Canadian Solar Surprises Again

| About: Canadian Solar (CSIQ)

Summary

Canadian Solar delivered record results in 2015 exceeding its guidance; the company showed significant earnings per share surprise in its last four quarters.

Regarding its valuation metrics, CSIQ's stock is considerably undervalued, the trailing P/E is very low at 5.97, and the PEG ratio is extremely low at 0.33.

In my opinion, the recent drop in its price creates an excellent opportunity to buy CSIQ's stock at an attractive price.

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Solar stocks had fallen in tandem with falling oil prices. Among the five top solar companies trading on U.S. markets, only First Solar (NASDAQ:FSLR) had its share price rise this year and since the beginning of 2015, as shown in the chart below.

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However, the fact is that there is no real fundamental connection between the price of oil and solar stocks since oil represents only about 5% of global electricity production. Demand for solar panels should increase significantly in the coming years due to clean energy demand and the sharp drop in their prices. The average cost of production of a solar panel has dropped by 69% since 2011, and technological advances continue to push down costs.

Renewable energy additions already surpass conventional energy, and solar is expected to be the fastest-growing source of electricity. Global annual PV installation will show a record of about 67 gigawatts this year, and near-term demand is forecast to be healthy. Global annual PV installations have grown annually by 38.1% between 2008 and 2014 and are expected to grow at an average annual rate of 8.3% in the next few years, as shown in the chart below.

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Source: Investor Presentation - March 2016

Canadian Solar (NASDAQ:CSIQ) was the second top solar company by megawatts shipped, revenue and profits in 2015, after First Solar. I consider CSIQ's stock as an excellent combination of superb value and high-growth tech stock. The company has a robust pipeline of projects, and its increasing number of global utility-scale projects is very promising. Canadian Solar is gradually gaining share in Asia, which is predicted to be a major solar market shortly, particularly Japan, India and China.

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Source: Investor Presentation - March 2016

Year to date, CSIQ's stock is down 34.9% while the S&P 500 index has decreased 0.4%, and the Nasdaq Composite Index has lost 4.7%. However, since the beginning of 2012, CSIQ has gained an astounding 609%. In this period, the S&P 500 Index has increased 61.9%, and the Nasdaq Composite Index has risen 83.2%. Nevertheless, considering its compelling valuation and its strong growth prospects, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price.

CSIQ Daily Chart

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CSIQ Weekly Chart

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Charts: TradeStation Group, Inc.

On March 10, Canadian Solar reported fourth quarter and full year 2015 record financial results, which beat EPS expectations by a large margin of $0.29 (38.2%). The company's revenues of $1,120.3 million for the fourth quarter also surpassed the consensus estimate of $1,022.8 million. Canadian Solar showed significant earnings per share surprise in five of its last six quarters, as shown in the table below.

Source: Yahoo Finance

In the report, Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked:

This was a record breaking year for Canadian Solar. Our track record of consistent and reliable execution continues to reinforce our competitive position and strong bankability. This in turn is providing us with excellent support from financial institutions and investors worldwide. The more than 4.7 GW of total solar module shipments in 2015 underscores the vast growth opportunities we see ahead in our key markets worldwide. Equally important, we continue to make impressive progress in the buildout of our Energy or total solutions business, with 398 MW of solar plants in operation, a late-stage project pipeline totaling 2.0GW in execution, and an early stage project pipeline of 8.3 GW in development, 2.6 GW of which is in the U.S. and will benefit from the recent ITC extension. This gives us considerable visibility into our earnings power, as well as flexibility over the timing of the potential launch of our own YieldCo.

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Source: Investor Presentation - March 2016

It is worth noting that the company had updated its fourth quarter revenue guidance upwards on February 16, to between $1.02 billion and $1.07 billion with gross margins above the high end of the previously guided 13%-15% range. Actual fourth quarter revenue of $1.12 billion came in above the preannounced range, and gross margin of 17.9% was much higher than the previously guided value.

The company offered new guidance for the first quarter of 2016. Canadian Solar expects total module shipments to be in the range of approximately 1,085 MW to 1,135 MW, including approximately 15 MW of shipments to the company's utility-scale solar projects that may not be recognized in first quarter 2016 revenue. Total revenue for the first quarter of 2016 is expected to be in the range of $645 million to $695 million, with gross margin expected to be between 12% and 14%. Although the new guidance is significantly lower than the year-ago revenue of $861 million, the new guidance indicates the company's plans to limit project sales in anticipation of holding the assets for a YieldCo.

On a conference call along with the fourth quarter report, CEO Shawn Qu explained that while the company guided for 5.4 gigawatts to 5.5 gigawatts on module shipment in 2016, the company can sell more than 6 gigawatts. However, according to Mr. Qu, that should not be the company's focus. Canadian Solar's focus for 2016 is to maintain a reasonable and steady growth on the shipment, and to put the focus on the upgrade of the technology and also some expansion of its cell and wafer internal capacity rather than focus too much on the module capacity. As such, the company will have a better margin structure. So even if some of the overcapacity do happen at some of the other solar peer companies indicated, its strategy will make it better preparing for that than its competitors.

Concerning the much-awaited YieldCo, Mr. Qu said that they have been preparing for the launch of the YieldCo with some of its high-quality solar power assets if the market condition allows. However, they remain flexible and are actively considering several other options to monetize their solar power plant assets. These options include, for example, sales of solar power plants, and their asset-backed securitization. They believe that their solar power plant assets in low-risk OECD countries are valuable and highly liquid. Their goal is to maximize the long-term return to their shareholders.

Valuation

Regarding its valuation metrics, CSIQ's stock is considerably undervalued. The trailing P/E is very low at 5.97, and the forward P/E is also very low at 6.00. The price to sales ratio is very low at 0.30, and the price to free cash flow is exceptionally low at 2.69. Furthermore, the Enterprise Value/EBITDA ratio is very low at 6.92, and the PEG ratio is extremely low at 0.33. The PEG ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means the stock is more undervalued.

Moreover, CSIQ's Efficiency parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below:

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Source: Portfolio123

Canadian Solar has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was high at 18.3%, and the average EPS growth was also high at 19.6%. The average annual estimated EPS growth for the next five years is very high at 20%.

Ranking

According to Portfolio123's "ValueRank" ranking system, CSIQ's stock is ranked first among all 347 tech companies with more than $1 billion market cap.

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The "ValueRank" ranking system is quite complex, and it is taking into account many factors like 5-year average yield, sales growth, trailing P/E, price to book, price to sales and return on equity, as shown in Portfolio123's chart below.

Back-testing over sixteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.

Summary

Canadian Solar delivered record results in 2015 exceeding its guidance; the company showed significant earnings per share surprise in its last four quarters. Canadian Solar has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was high at 18.3%, and the average EPS growth was also high at 19.6%. Regarding its valuation metrics, CSIQ's stock is considerably undervalued, the trailing P/E is very low at 5.97, and the PEG ratio is extremely low at 0.33. Furthermore, according to Portfolio123's "ValueRank" ranking system, CSIQ's stock is ranked first among all 347 tech companies with more than $1 billion market cap. In my opinion, the recent drop in its price creates an excellent opportunity to buy CSIQ's stock at an attractive price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.