Canadian Solar Shines With Strong Guidance and Results

Canadian Solar, Inc. (CSIQ) reported very strong first-quarter results on May 13 that included a dramatic turn-around in net income, which advanced to $18.99 million from a loss of $3.85 million in the same period last year. Not to be outdone, just two days ago the company boosted its full-year 2008 revenue guidance, which gave its stock price a very nice jolt. Moving forward, with alternative energy companies generating more attention and business because of sky-rocketing fossil fuel costs, Canadian Solar should be well positioned to cash in on the trend.

Canadian Solar, Inc. develops solar modules that convert sunlight into electricity, and sells its products to a wide variety of international markets such as Germany and China. The company was founded in 2001, carries a market cap of $1.35 billion and is headquartered in Markham, Canada.

Impressive First-Quarter Results

The alternative energy sector of the market has been very hot for quite some time now, as consumer and investors alike attempt to shield themselves from the sky-rocketing costs of fossil fuels. This trend was apparent when Canadian solar reported excellent first-quarter results on May 13.

Revenue grew to $171.2 million, a 34% increase from the same period last year. Net income was surged ahead to $18.99 million, up from a loss of $3.85 million in the same period last year. This produced earnings of 61 cents, way ahead of analyst estimates of 29 cents.

A Habit of Surprising

Canadian Solar has been making a habit of surpassing analyst expectations, having surprised over the last three quarters by an average of 13 cents.

The company CFO, Mr. Bing Zhu, said that the three primary drivers for revenue growth were strong pricing power, internal cost cutting measures and favorable currency exchanges. While the currency translations may not be sustainable, Mr. Zhu noted that the company believes it can continue to build its margins through cost controls.

Full-Year Guidance Is Up

After recently commencing deliveries of its solar products to two of its key customers, Canadian Solar went ahead and boosted its full-year 2008 guidance just two days ago, on June 17. The company is now projecting revenues between $750 and $870 million, up from the previous range between $650 and $750 million.

Attractive Solar Valuations

With the increased revenue guidance in hand, this company's valuations are more attractive. The analyst's current-year estimate does not appear to reflect the increased guidance, but based upon the existing projection, this company carries a forward P/E multiple of 24X. That is pricey compared to the overall market, but when compared to other solar stocks, it actually looks like a bargain. And this is before the current-year estimate has been revised to include the company's recent revenue forecast upgrade.

The Chart

After news of Canadian Solar boosting its revenue guidance hit the street, its share price took-off, advancing from just above $39 to its current price of over $51. This is a new 52-week and all-time high. With Canadian Solar operating in a red-hot sector, and the company focusing on cutting costs in order to boost its margins, its earnings should continue to support its stock price as more money pours into alternative energies. Take a look at the chart below.

 

Comments

[User 182177]

The news is too old and the chart published on June 22 is outdated. Does have a couple of interesting points, however. Nowhere near the quality of Dr. Jack Yetiv's writing and detailed analysis.

[Jack Yetiv]

Thanks for the kind words.

And I might add--after a meteoric run, I would be very concerned about downside risk in CSIQ, although I still like the company quite a bit (second to TSL).

When I recommended CSIQ in January when it was $18.56, downside risk was pretty limited because its PE ratio was around 10. It isn't now, with PE at nearly 20. For a sample of the risk, take a look at ASTI's run in May, and its fall since then. CSIQ may not repeat that chart pattern--but I wouldn't make any major bets that it will not.

These days, downside is limited for TSL, which itself is trading at a PE of about 10, whereas upside potential is substantial. See my various articles on both names for further analysis and risks in this space and with these companies.

Jack Yetiv

[rana]

this is really poor analysis. these kind of articles sre better left unread. you can look at older posts for much better analysis and debates regarding CSIQ.
i agree that CSIQ carries more risk than at the time of jack's article, but i still like it and will use technical pullback for new entries.
after doing lot of research lately on the solar world it is clear that it will become harder to pick the winners. there are too many variables in play at this time (price of silicon, incentives, price of oil, currency issues etc..).
like in other growth industries there will be few companies that will emerge as winners almost in every scenario. my pick is an equipment maker SPIR (was mentioned in earlier posts).
like jack i also like TSL a lot, but after reading the new growth prospects of the industry i'm joining the camp that isn't looking for big price drop on silicon in the next 12 months. for this reason i view SOL as number 1 pick and will add under 20.
if we have to grade by risk - TSL is little less risky on fundtamentals, but it carries sentiment risk which in case of a miss by the company can become a waterfall for the stock.
by growth SOL is graded higher (using analysts estimates for next 5 years).
this year estimated p/e for TSL is 12 and for SOL it's 16.6. next year we have 9 and 10.5.
the PEG is little better for TSL.
SOL just competed a secondary offering while TSL will probably need to do one in the near future. assuming SOL guidance includes the dilution and TSL doesn't we get better PEG and better 2009 P/E for SOL.
at this point we turn to the price of silicon and to cells and modules ASP's. these are parameters that will be very important in determining the winners and losers. the velocity of the demand will be key when prices will fall.
we must keep in mind that manufacturing costs keep rising fast. the view of falling silicon prices is detering new entrants lately (TSL is an example) while everybody still jumping on the the cell and module wagon.
a drop in demand for end products will be teriible for all the food chain. here will come absolute costs into play as well as margins. usually we just look at margins, but when crisis comes we also need to watch the staying power. SOL has much lower operating costs than TSL, which makes it more resiliant in a case of crisis along the whole food chain.
with all that said the difference between the 2 is lower than it was 2-3 weeks ago when i first started looking at SOL, as it wnet up a bit while TSL dropped a bit.
holding - SPIR (viewing this one as winner in most cases) SOL TSL SOLF CSIQ LDK STP (rating and quantities by this order).

[dicki31785]

Hi Jack how do you come up with trading @20 times earnings?...this was my simple calculation which I already posted in missed opportunities in Canadian Solar...

"To CSIQ after reading some comments(for ex. zachs.com comments) I just want to clear some things up....they (CSIQ) raised revenue guidance from $650-750 mil. to 750-870...In Q1 they had revenues of $171.2 mil...and earned just about 19 million....which leaves at an operating margin of just 11%...Lets us just assume that margin stays equal(which it will not the margin of CSIQ will expand but lets just talk worst case scenario)...and we take 810 mil of revenues(also conservative IMO but that is in the eye of the beholder) then we would get an income of about (.111x810)$90 million mil....so the stocks is actually trading at around 14 times earnings at the moment....and not trading at forward earnings of x24...which would imply earnings of $54 million so I cannot really understand those calculations..."

Is their some error in my math?or do you use different numbers?kind regards from Germany CW

Long ABX, CSIQ, NFLX, STP, TSL

[rana]

blogs.barrons.com/tech...
this is a link to some comments regarding polysilicon price, that was published today

[fanranger]

jack and followers of CSIQ
if you believe that csiq is ramping up earnings and carrying out execution very well
it can be hard to sell and buy and much easier to buy and hold and go for the ride.
27 million shares and growing earnings plus a large position of short stock folks make it look as though the stock is head for $60 this year.

[svosavvy]

Hey Jack,

Do you think the Goldman drubbing of tsl will drive it down anymore? I just bought some at 33.60 to get on the wagon, but, am wondering if there is more downside buying opportunties on the way. What do you think?