When a sector is booming, consolidation and takeovers start to pick up as well. Take a look at the networking and semiconductor sectors in the late 1990s, and the internet sector in the early 2000s - several good companies were taken over by industry leaders, such as Cisco (NASDAQ:CSCO), PMC-Sierra (NASDAQ:PMCS) and Google (NASDAQ:GOOG). These companies accelerated their growth by acquiring many smaller competitors. This is a must-step for a sector before it becomes mature.
As an investor, the difficulty is how to spot a company that is a likely takeover target. This can bring massive profit if it does happen, and even the speculation will drive the stock price sky rocketing, no matter what happens in the overall market. A good example in the last week is DOW Chemical's (NYSE:DOW) attempt to buy Rohm & Haas (ROH) for $15B, sending the stock 70% higher than its previous day close. But wait, this is just beginning. The next day, in the same sector, was Ashland's (NYSE:ASH) announcement to acquire Hercules (HPC) for a buyout premium of about 38% over the shares' Thursday closing price.
Now let's take a look at the major sector of renewable energies: the solar sector.
The solar sector has picked up momentum in the last year as oil prices keep going up and analysts predict that cheap oil is gone forever. More importantly, both US presidential candidates are leaning towards renewable energies, especially solar and wind. Obama has spoken out that solar is the way that American can get rid of dependence on foreign oil and put the country again back on its feet. Overall, the solar sector is poised to boom in the near future. Not so long ago, a European solar company, Solon AG, made a splash when it acquired both Estelux and SpectraWatt for expansion.
This started the takeover story in the solar sector. So who is the next target? It seems that a good company with a relatively small market cap will be the likely candidate. Looking around in the space, Canadian Solar (NASDAQ:CSIQ) pops out.
Canadian Solar (CSIQ) is one of the best performers in the last 6-12 months, yet its market cap is merely $900M at the current price. Take a look at a comparison for the stock price performance here. It is on top of First Solar (NASDAQ:FSLR). The company has year over year revenue growth rate of 180.4% (source: Yahoo Finance) and recently raised 2008 sales forecasts again from 200 - 220 MW to 230 - 260 MW (the first solar company to do so, if I remember correctly). So is it growing too fast? Absolutely NOT. If you look at the revenue and sales curve over past year and coming quarters, the stock price is simply not reflecting the growth of the company. The price should be over $50 now (thanks to the Spain subsidies rumors, CSIQ's stock price is at discount level).
Unlike other solar companies, whose sales are mainly in Germany and Spain, Canadian Solar has sales in many regions. It continues to strengthen sales in Germany and Spain, while extending sales to Italy and Eastern Europe. More importantly, the company's latest e-module attracted a significant number of customers. The recent sales reached the US and South Korea with initial shipments of 10-12MW.This is more than First Solar's latest Edison International contract for a 7.5MW plant in California. The next Japanese market will kick off a new era for Canadian Solar.
US-based SunPower has major sales in Europe and recently signed a deal with FPL Group (NYSE:FPL) in the US. However, its Asian reach is limited due to its US operation limitation. With South Korea, China and Japan embracing solar at an impressive speed, reaching out to those markets is critical for a company's success globally. One way to overcome this is to buy a local solar producer, such as CSIQ.
Suntech is the leader in terms of sales. The company has market cap of roughly $6B. However, the company's stock has been barely moving, partly because its growth rate is a concern to many analysts. The competition for silicon supply is high, and many local companies are grabbing market share from Suntech. Acquiring Canadian Solar is a good way for the company to move to the next level and achieve its global sales target.
One advantage of these two companies merging is that both have operations in China. Cost reduction will be significant after the takeover.
Finally, based on the sales forecast and aggressive guidance from the company, Canadian Solar (CSIQ) should be worth at least $1.5B at current prices if we see any takeover offering. The coming quarter results should surprise again on the upside.
Disclosure: Author has long positions in CSIQ and FSLR