CSIQ - Downgrade from Hold to Sell
FSLR - Downgrade from Buy to Hold
Solar companies continue to look very weak right now, and we have lowered our estimates on two companies, Canadian Solar and First Solar. CSIQ, however, looks to be in much worse shape than First Solar. FSLR will be in the red in operating income this year, but most of this is due to restructuring costs. They still have pretty solid gross margins at over 20%, and once restructuring is done, the company should be back on track for 2013. One aspect of the FSLR brand that we believe does give it some upside is its operations are in North America. The USA is beginning to close off their services to Chinese manufacturers, which will allow First Solar to recover. This movement also hurts companies like Suntech Power (STP) and Trina Solar (TSL). We still are cautious about the company, though, because we are not sure how well they can do without their European division. We are keeping estimates cautious for 2013-2014 still, and that is why we are not yet ready to Buy. The stock is very cheap, though, and for those that believe the 2011-2012 disaster is over should take a hard look. Canadian Solar, additionally, is a solar company that we had to reduce our estimates on as the company continues to struggle to turn profits. For CSIQ, we are not estimating profits will be reached until 2014 for the company. A worry for smaller solar companies now becomes liquidity as well. CSIQ has negative free cash flow, is not turning profits, and has extremely high debt levels at over $1B. The company's market capitalization is only $130M as a comparison. The company needs to cut costs in order to be more profitable as their costs cannot compete with cheaper coal and natural gas. CSIQ has commented that they do plan to cut costs through potential employee cuts and better utilization of manufacturing, but there have been no signs of margin improvement yet. The company, additionally, has been trying to move into new markets, but we are still not seeing profits in the near-term. Until then, avoid both companies.
Outlook looks decent for First Solar and worrisome for Canadian Solar. FSLR has an ample American market that while still probably two-three years away from a large ramp up has the ability for subsidies and wants to grow American companies. At this time, however, we still believe the next 12 months are going to be rough for First Solar. Canadian Solar, on the other hand, is one of the least exciting solar companies from China. They have commented that they will be taking measures to reduce costs, but their outlook is murky. No actual plans have been announced. A cutback in workers and potentially shutting down some facilities would go a long way to improve outlook.
Profitability is obviously an issue for solar companies right now. Cost cutting measures are occurring, and FSLR is doing a much better job than Canadian Solar is doing. First Solar's movement to shut down European operations and cut costs is going to help them move to profitability in the next year. CSIQ has not made any moves yet, and we do not believe that they will turn profits of significance until 2014. All in all, profits are a ways off for both companies, and until companies can compete with the likes of natural gas and coal, we would avoid these companies unless value becomes very attractive.