Canadian Solar: The Next Solar Takeover Target?

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 (CSCO), PMC-Sierra (PMCS) and Google (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 (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 (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 (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 (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.

So who is the likely buyer? I would say either SunPower (SPWR) or Suntech Power (STP), both polysilicon based solar companies.

US-based SunPower has major sales in Europe and recently signed a deal with FPL Group (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

Comments

[User 182177]

I believe, CSIQ on its own can appreciate far more in terms of stock price appreciation in the next 3 to 5 years. As a long term CSIQ investor, I don't like this at all.

Hope it will not happen.

[atauber]

its always good to own a stock whice you DONT want someone should buy.......

[Dicki]

Agree with you "user" to a certain extent...I am long as well....Since 16 on and off....and if we get offered a 100$/share and up....i would take it but otherwise no thank you!!!After Q2 results we are going to go through the ATH easily and stand around 60$/share and then we would at least a premium of 50-100% with those growth rates....so between $90-120 would be the price for a takeover which is still ridiculously cheap actually in the long term as you pointed out...but who knows their is still some unknowns and if would get a 200% premium it would be tough to say no....

@Kelvin Schulle nice article....but sell those FSLR longs if you like your money...;):)Alternativ... are TSL (based on value) and LDK(if poly stays constrained that should be quiet the nice investment...though I have some info to the contrary concerning Poly)...but FSLR...at that valuation...and not even that great of a technology since you need twice the panels to reach the same efficiency as SPWR but the panels cost half....so i can't really see the adv. of holding FSLR...and the problems your fellow writer mark anthony mentioned are also worth taking a look at....
kind regards from Germany

CW

[User 182177]

The following Performance Chart was provided by a friend of mine, "buffetlike" (Yahoo board screen name).

stockcharts.com/charts...

[Wafarer]

I wonder what CSIQ's technology is like? Do they have anything in research? SPWR's new lines are going in at 23% solar efficiency. I guess CSIQ's are more average at 15-16%. I am not sure why a company would want to own lower efficiency manufacturing.

[sirfisup]

Analysts are not concerned about STP's growth curve for China will be there biggest market and they haven't even begun to ramp-up sales there in a big way. STP also has the lowest contract pricing of any Chinese solar for polysilicon so its growth rates will no longer be impeded as they were before. In addition to their PV and solar cell business they have thin film BIPV which in time will represent the greatest market potential for commercial and residential adoption and is more likely to see major innovation. STP will be more interested in aquiring any company with disruptive technologies of which can be integrated into their solar products so you are correct that STP would like to expand their business but purely from a R & D position for CSIQ does not offer STP any added innovation and therefore would not be considered a viable takeover candidate.

[tessant]

i think that the industry needs some consolidation at this point...

scott
solarfeeds

[gebby]

csiq has innovation. umg

[wsigler]

Conspicuous by his failure to weigh in - is Jack Yetiv....Usually has a great deal to contribute, especially on TSL.....

[TraderMark]

Kevin,

When was the last time an American company took out a Chinese company. I'll await an answer; it will be a while. Just pure speculation that makes little sense sorry re: SPWR

[GH]

"More importantly, both US presidential candidates are leaning towards renewable energies, especially solar and wind."

Absolutely false in the case of McCain. Do your homework, check his voting record when it mattered (close votes). He's in the pocket of Big Oil, just as Bush was.

If you invest in alternative energy, this is your biggest risk factor. Research deeply. Consider who will be put in cabinet positions, heads of agencies etc.

[Jack Yetiv]

Been very busy lately, working on a Supreme Court brief (finished rough draft last night) while also on vacation (Disneyland past few days).

Anyway, as those who have read my articles know, I am very bullish on solar. People also know I recommended CSIQ about 6 months ago when it was trading at $18.56 as my favorite company in the solar space. Finally, we all know that CSIQ increased guidance this morning by a substantial margin.

My three favorite companies in the solar space today (for best appreciation potential versus least downside risk) are SOL, CSIQ and TSL. Of the three, SOL is probably my favorite because (a) it has a very good forward PE of about 12 against the current price of $15.50, (b) it has lots of positive analyst sentiment and a history of explosive upward moves. It would not take much, in my opinion, to get SOL up to $30, its all-time high, essentially offering a double from where it is trading today.

I like TSL because it offers the best value in the solar space (PE of about 9) but analysts do not like this company for various reasons, mostly relating to the fact that this company's management makes no effort to communicate with the street. They miss more solar conferences than they attend, they announced earnings waaay late last quarter, they hit the street with a surprise "functional currency" issue last quarter, they rarely issue press releases which maintain a level of excitement on the street, etc.

To me, TSL executes nicely (best margins among the poly-based solars, best geographic diversification of any solar, very aggressive sales and earnings ramp) but does an AWFUL job of communicating this success to the investment community.

Therefore, it trades at a very substantial (and partially deserved) discount to its solar brethren. The wild card is whether TSL will change its ways. If it does, then I could see this stock doubling to $60 in short order if it reports well, which it should this quarter. However, if management continues to act as it has, although TSL is very likely to get back to the $40's in the next month, its performance will continue to be underwhelming when compared to its actual execution.

Finally, I continue to like CSIQ at its current price around $37, which is a PE of about 18 against 2008 projected earnings, which will soon be upgraded by the analysts based on today's announcement, lowering the PE to about 15. This company has been managing both its business and its investment-community communications brilliantly, and consequently has generated a lot of excitement among the analysts.

I can see CSIQ passing its recent high of about $52 (based on memory) in this earnings season.

We are heading off to the beach now. I will post later about risks in this space (need for additional capital--a greater concern for TSL than CSIQ or SOL) and why I think it is unlikely these companies will be bought out by SPWR, and probably not by STP either.

Jack

[User 182177]

I believe all CSIQ long-term investors will be very pleased to read the writings of "wayfarer" and "sirfisup". They have provided "valid" and "sound" reasons for why SPWR and STP will not buy CSIQ. Also, Dr. Jack Yetiv (I respect his opinion highly) doesn't think that that will happen either, and will furnish his thoughts on this matter at a later date.

Thus, CSIQ long-term investors have a lot to celebrate for, due to these insightful opinions. Because if CSIQ is acquired by any one of these companies, the "Performance King" will just turn into a "Performance Dog" overnight.

[User 182177]

The performance chart of CSIQ vs. SPWR & STP.

It is music to the ears to CSIQ long-term investors that SPWR & STP will not buy CSIQ. CSIQ will be able to appreciate far more as an independent company. No CSIQ long-term investors will want this to happen -- turning a Performance King into a Performance Dog.

stockcharts.com/charts...

[buystocks]

I just sold all of the shares I have, I have a very bad feeling for CSIQ tomorrow will drop a lot and back to normal at $32.

[User 226214]

we got a trouble here, CSIQ offer seconary again. This stock will
go back or even lower tomorrow.

Link:biz.yahoo.com/prnews/0...

[ramran567]

Does it not make more sense that two companies with similar products and almost similar client base/region consolidate? I am referring to CSIQ and SOLF. They are both China based companies(although CSIQ is located in Canada), both are PV module makers, both have clients in Europe and both have almost similar growth and numbers?

[vitamin_j]

My take on why STP or SPWR won't acquire CSIQ:

SPWR's business is based around the idea of producing and selling a premium high-efficiency panel, which offers the benefit of cutting "balance of system" costs (higher efficiency means less panels per system, means less wiring, racking, labor, etc. to install). That focus on "balance of system" explains why SPWR acquired Powerlight and participates in the installation/integrati... business - it's where they will best compete in the solar value chain as their business progresses.

Why then would they want to get a producer that makes panels that are OK, industry standard, but aren't any more efficient than the norm? So they can buy the company, then retrofit all the production lines? Or increase the number of panels per installation? What does UMG get them - beyond panels that are less efficient than the norm? Such an acquisition would just weaken Sunpower's strategy, so I don't see it as likely.

With Suntech, it's a little more of a natural fit. However, I'd question why they wouldn't just take the billion plus they'd spend on CSIQ and put it towards their own capacity expansion? The extra capacity would be the only thing of value STP would gain, plus there would be the money, time, and risks involved in bringing together two different manufacturing organizations, QC methods, etc. It's easy as an investor to treat these things as afterthoughts, but they're the "devils in the details" for M&A.

Finally, I'd mention that Suntech CEO Dr. Shi was pretty dismissive of UMG technology during the Q&A at the recent InterSolar show. So neither company seems likely to acquire CSIQ, in my opinion.

[User 226214]

I know tomorrow is gonna be a bad day for CSIQ, It is down to $36.5 after market. People are dumping so fast and going on now.

[User 182177]

There are so many readers of "SA", we got to have quite a few people who have observed and played the stock market for a long long time (or decades). These folks can certainly provide us with some history about this kind of thing (secondary offering) which had happened to so many young and high growth companies before - what happened when the "secondary offering" was out of the way (means the stock prices afterwards).

I can not be the only one. I'll leave this to those, who are wiser and have more experience than me, to comment on this.

(Actually, a few of my friends and I have expected this to happen quite a while ago - we just didn't know "when". Each one of us has already got "a plan" and ready to go.)

[xz1]

what happened to seekingalpha? not many quality posts any more, but tons of "shallow" "pumpers". i hardly see any difference between yahoo message board vs this one. Yeah, valuation is low because it is merely 900mil, how about 1000B? this post simply remind me of the internet bubble that just left us not so long ago. i heard people name their holding prices and hope to hand them over to the next idiot who turned out to be himself.

[frflyer]

McCain gives lip service to alternative energy, while really pushing for more oil drilling and more nuclear. As T Bone Pickens says, we can't drill our way out of this problem. Solar is much faster to get up and running than nuclear. So is wind. Why would we want power sources that need fuel of any kind, when there are better alternatives? Fuel is just something for some big corporation to control and profit from. They are scared to death of solar and wind because they can't control it. Further Republican control of our government is like a death sentence for the environment and for alternative energy like solar and wind.

[Kamal Ahuja]

Kelvin Schulle quotes "Acquiring Canadian Solar is a good way for the company (Suntech Power / STP) to move to the next level and achieve its global sales target". I believe that acquiring a company solely for the purpose of gaining market share is one of the worst strategic moves a company can make (except when it is a distress sale). There really is no need for the solar PV module manufacturing sector to think about consolidation at this time. Most of the emergent companies have been successful in raising additional capital to expand production and operations. Unlike the internet companies in the "bubble years", most of the solar companies are on their path to profitability. I will be looking for other reasons to warrant consolidation in this sector.