Canadian Solar: Opportunity in Multiple Contraction from Dilution

Earlier this week Canadian Solar (CSIQ) increased the mid-range of their revenue guidance by 13%.  Then, that same evening, they announced that they were diluting shares by offering 3.5 Million new ones at $34 each.  A significant dilution.  The shares surged, then have since pulled back - appropriately.

But take a look at this, the last four quarters earnings are, according to Yahoo Finance, in order:

$-0.11 $0.02 $0.20 $0.61

Analysts estimates for the 2nd and 3rd quarter of this year are:

$0.45 $0.55

CY estimates of $2.18 and next year’s estimates are $3.52

Well, talking pre-dilution and considering the raised guidance, they should at least meet the previous estimates (made before the raised guidance).  This is going to mean, within the next four months, the ttm eps are going to go from $0.72 to (hopefully) at least $1.81.  More than cutting the PE ratio in half, if the stock stayed flat.

After the dilution that $1.81 figure falls to $1.61. The current PE is about 50.  Even if the multiplier fell to 25, it’s still a $40 stock looking at the ttm, four months could bring.  Obviously, provided they have a good four months and maintain the positive outlook.  My point isn’t really that the PE could be halved, and share holders still win, it’s that within the next two quarters this stock is going to start showing up on allot of stock screens.  I mean, replacing that $-0.11 with a $0.45 quarter, will get this stock noticed.

I would also like to comment on the pull-back due to dilution.  At the time of writing the stock was at $31.70, and before the announcement, the stock closed at $38.20.

At $38.20 CY EPS estimates are $2.18 and next year analysts see $3.52.  After the math from the dilution, CY EPS estimates become $1.93, and $3.12.  That means this recent drop of $6.50, meant the ttm PE of 53 has fallen to 49.7, the CY PE has fallen from 17.5 to 16.4, and FPE from 10.9 to 10.2.  Clearly, either the street over-reacted to the upped revenue guidance in the first place, OR, the street over-reacted to the dilution and the shares are both price point cheaper AS WELL AS fundamentally cheaper.  I should also add, the company is fiscally stronger after a dilution too.

Bottom line, the stock pulled back 17%, but should have only pulled back 11.3%, assuming it was fairly valued at $38.20.

Disclosure: Author wrote $35 puts for July, and will likely be assigned the long underlying position Friday.

Comments

[User 226214:]

You are calculating the wrong P/E, It should be some where like 12 for this year.

2008 Jul 17 07:35 PM

[10Q Detective:]

In The Street over-reacting to --one of many solar plays--that constantly has to tap the equity markets to finance its growth [when cost of capital begins to exceed IRR expectations, watch out on the downside]

industry.bnet.com/ener.../

My Best,

David J Phillips - Editor, 10qdetective.blogspot....
Contributing Energy Analyst
CNET/BNET

2008 Jul 17 11:06 PM

[James Shaw:]

The drop may be due to Spain's news because almost all solar stock dropped Thursday even SPWR reported very good quarter.

Long term: Buy from here.

2008 Jul 18 04:44 AM

[User 226214:]

Totally over reacted, I wish I have more money. I was all in.

2008 Jul 18 01:23 PM

[buystocks:]

All in to TSL and SOLF.

2008 Jul 26 03:52 AM

[gebby:]

people keep focusing on the need to raise capital. but fail to focus on the dramatic growth. csiq was 11 aug 2007, aug 2008 28, aug 2009.......70? in the worst market since the great depression we have here an industry that is growing. lets not forget global warming. do we as humans want to survive or not?

2008 Jul 28 12:12 PM