Image Source: Canadian Solar
In my view, Canadian Solar's (NASDAQ:CSIQ) stock is considerably undervalued; its P/E is very low at 5.74, and its PEG ratio is extremely low at 0.36. Furthermore, the company has recorded substantial growth in the last few years. CSIQ's annual average sales growth over the last five years was very high at 18.3%, and the average EPS growth was also very high at 20.4%. The average annual estimated EPS growth for the next five years is high at 13.3%.
Canadian Solar, one of the world's largest solar power companies, delivered strong first quarter financial results which beat EPS expectations and raised revenue guidance for 2016 to $3.0-3.2 billion up from $2.9-3.1 billion, reflecting the expectation to sell more solar power plants in the second half of the year. The company has a robust pipeline of projects, and its increasing number of global utility-scale projects is very promising. According to the company, its project business continues to be strong with on schedule progress for construction in the USA, Japan, and the U.K. CSIQ's financial strength has allowed it to finance its projects at lower than expected rates.
On May 11, Canadian Solar reported strong first quarter financial results, which beat EPS expectations by a large margin of $0.25 (179%). The company's revenues of $721.4 million for the first quarter also surpassed the consensus estimate of $653.2 million. The company showed significant earnings per share surprise in six of its last seven quarters, as shown in the table below.
Source: Yahoo Finance
The company had in the quarter a combination of lower than expected costs due to strong execution in its factories and a favorable country mix, including better than expected currency results as the U.S. dollar weakened against several of its key trading currencies.
By geography, in the first quarter of 2016, sales to the Americas represented 43.1% of net revenue, sales to Asia represented 44.4% of net revenue, and sales to Europe and others represented 12.5% of net revenue, compared to 51.9%, 41.1% and 7.0% respectively, in the fourth quarter of 2015 and 48.7%, 32.9%, 18.4% respectively, in the first quarter of 2015.
In the report, Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked:
Our results for the first quarter came in above guidance, driven by robust demand in our solar module business. The results do not include the benefit of any solar project sales in the quarter, however, in the future we will continue our balanced approach of project retention and project sales to maximize both flexibility and valuation, as well as to balance our cash flow. We now have approximately 438 MWp of solar power plants in operation, with a resale value estimated to be approximately $950 million. The company does plan to sell some of these assets in the second half of this year, at the same time as we bring additional solar power plants into operation. Our steady, longer-term approach has positioned Canadian Solar for sustained success and has set Canadian Solar apart from competitors. We remain confident in our business model, outlook and in our ability to manage our profitable growth.
I see continued high growth prospects for the company. According to CSIQ, its strong results and financial position have enabled it to continue to expand its upstream cell and wafer capacity which the company expects to result in better and tariff-free margins this year. CSIQ financial strength has allowed the company to finance its projects at lower than expected rates. On a conference call along the first quarter report, CEO Shawn Qu said that the company expects to add 1.1 gigawatts of operational solar power plants to its portfolio by the end of 2016 which provides it with valuable inventories and great flexibility. According to Mr. Qu, the annual revenue may increase by additional $200 million to $400 million should the company decide to sell more solar power plants. Mr. Qu said that they were actively considering several options to monetize solar power plant asset. These options include, for example, outright sales of solar power plants, the company's asset-backed securitization and potentially a public or private YieldCo depending on the market condition. The company believes that its solar power plant asset in low-risk OECD countries is valuable and very liquid. Their goal is to maximize the long-term return to their shareholders.
Year-to-date, CSIQ's stock is down 41.6% while the S&P 500 index has increased 0.1%, and the Nasdaq Composite Index has lost 5.8%. 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
Chart: TradeStation Group, Inc.
Regarding its valuation metrics, CSIQ's stock is considerably undervalued. The trailing P/E is very low at 5.74, and the forward P/E is also very low at 6.12. The price-to-sales ratio is extremely low at 0.28, the price to book value is low at 1.09, and the price to cash flow is very low at 3.81. Furthermore, the Enterprise Value/EBITDA ratio is very low at 8.64, and the PEG ratio is extremely low at 0.36, the fifth lowest among the 295 tech companies with a market cap greater than $900 million. 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.
The 10 companies with the lowest PEG ratio among tech companies with a market cap greater than $900 million
Canadian Solar delivered strong first quarter results exceeding its guidance and raised revenue guidance for 2016. The company showed significant earnings per share surprise in its last five quarters. I see continued high growth prospects for the company. According to CSIQ, its strong results and financial position have enabled it to continue to expand its upstream cell and wafer capacity which the company expects to result in better and tariff-free margins this year. The company has recorded substantial growth in the last few years, and regarding its valuation metrics, CSIQ's stock is considerably undervalued. 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, but may initiate a long position in CSIQ over 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.