Canadian Solar: Why Do the Best Solar Stocks Get the Least Coverage?

It seems that most stories you read about companies in the solar space focus on First Solar (FSLR), Sunpower (SPWR) or Suntech Power (STP), all of which have PEs in excess of 50. Just like the sexy stocks of the dot-com era, these stocks are touted by some analysts without regard to normal metrics such as price-to-earnings or price-to-sales ratios, and without looking at other companies in the same space that may offer a better risk-reward ratio.

One can never predict the future, of course, and maybe I'll be proven wrong and these stocks will continue to run (after their ongoing correction is over), but I would rather invest my money in stocks with PE and P/S ratios closer to earth.

Case in point: Canadian Solar (CSIQ). This company makes conventional solar panels and specialty solar panels, which does not distinguish it from the crowd. What does distinguish CSIQ is that with a market cap of about $500 million based on yesterday's closing price of $17.90, and based on 2007 expected sales of between $265 and $290 million, its P/S ratio against 2007 sales is less than 2:1, while First Solar's P/S ratio--even after its recent 30% drop from its 2007 high--is about 30 against 2007 expected sales.

What is interesting is that FSLR's expected 2007 revenues are about $500 million, whereas CSIQ's expected 2007 revenues are about $275 million. Is there some logical reason that FSLR, with 2007 sales that are not quite twice CSIQ's, should have a stock price that is more than 10 times as much?

If you think the answer is based on 2008's expected revenues, you will be even more surprised because expected revenues for FSLR in 2008 are about $800 million, while CSIQ's expected 2008 revenues are between $650-750 million. In fact, the disparity in revenues almost disappears in 2008! So again, why should FSLR be touted by many analysts as being worth $200, $250 or even $300 per share while CSIQ trades at under $20/share?

Aha, you may think the answer is in the EPS numbers because revenues don't tell the whole tale, but EPS doesn't explain the 10-fold disparity either. Expected EPS in 2008 for FSLR is around $2/share, whereas it is between $1.20 to $1.60/share for CSIQ (depending on the source). So whereas CSIQ trades at a forward PE of about 15, FSLR trades at a forward PE of about 90.

Sure, FSLR has executed brilliantly so far, and its technology for making solar panels does not require silicon, but if these were the outrageous advantages that some analysts make them out to be, it should translate into outsized earnings--and as can be seen above, it has not. Sure, $2 per share is better than $1.40 per share, but it simply does not justify a 10-fold disparity in the value of the stock.

What this tells me is that if both these companies execute as expected, and assuming an "efficient" stock market, the stock prices of FSLR and CSIQ should be much closer at the end of 2008 than they are now--either because FSLR has remained flat or gone down, or because CSIQ has gone up, or most likely both.

Finally, whereas various authors have opined that "solar stocks" remain overvalued despite their recent correction, and that 2008 will be a bear (rather than banner) year for solar stocks, based on the above analysis, I think 2008 will be the year in which more sophisticated investors will look at the metrics of the various companies in this space and reward the ones with compelling valuations and PE and P/S ratios that would be reasonable for even non-solar companies.

Disclosure: The author does hold a position in CSIQ, but not in the other stocks mentioned in this article

Comments

[GH:]

Nice job! Could you do a follow-up that makes the same comparison for the other second-tier solar panel makers (JASO, YGE, TSL, ENER, SOLF, ASTI, DSTI, AMAT, AKNS)? Thanks!

2008 Jan 17 09:03 AM

[MAXMONEY:]

Excellent comparison. I agree with GH that like comparisons with other solar stocks would be very useful for investors.

2008 Jan 18 01:52 PM

[l jones:]

excellent observation, i could not agree more.

2008 Jan 18 02:11 PM

[Toto-13:]

I love you. I love that you took the time to cover these very interesting stocks. I also have some infor you guys can use at
WallastonInvestments.c... - check it out, however, keep up the good work. This year, we are going to do very well!

2008 Jan 19 01:13 PM

[Jack Yetiv:]

I will submit another article doing exactly the analysis requested above, hopefully this week if time permits, although I won't have the time to cover all the companies mentioned above (if time permits, I will try to cover JASO, YGE, TSL, ASTI, DSTI, LDK and AKNS). I can tell you, however, that prior to investing a rather large sum in CSIQ, I already did that analysis and found CSIQ to be a better value than most of the stocks mentioned above.

Jack Yetiv

2008 Jan 22 02:10 AM