A Strong History of Sales and Earnings Growth
Canadian Solar (NASDAQ:CSIQ) has a strong history of sales and earnings growth. Over the past five years, EPS growth averaged 46.90% per year, while sales growth averaged 36.20%, higher than all other solar companies except SCTY. With the lowest P/E ratio (5.28) among all solar companies - and all specialized semiconductor industry companies for that matter - I believe the concerns about future growth have been exaggerated and the company is undervalued at the current stock price.
CSIQ is surely one of the financially sound solar power companies in the world: it is the best among all solar companies for ROA (9.7%), ROE (44.5%), and ROI (16.7%); and also on of the leaders in terms of gross margin (19.8%), operating margin (12.8%), and profit margin (8.9%). Its ROE in particular is light years ahead of the competition, with SunPower (NASDAQ:SPWR) coming in second at 11.90%. CSIQ seems to be a well managed company, which gives me confidence that its future performance will fuel growth in the stock price. (Source: Finviz)
A World-Wide Footprint
The company has manufacturing capacity in both China and Canada. Its modules produced in China have recently been slapped with tariffs in the US and the EU. This is one of the reasons why CSIQ's stock price has fallen recently - investors are rightly concerned about the company's short-term growth prospects given the new barriers to selling modules in two of its largest markets. Canada has also imposed tariffs on solar modules produced in China; but with a 500 MW annual production capacity in Canada, CSIQ will not be affected by the recent imposition of tariffs on Chinese solar panels imported into Canada. According to the company's CEO, most of the modules supplied to Canadian markets are produced locally. (Source: PV-magazine)
A presence in more than 70 countries put the company in a unique position to take advantage of global demand growth. In the short-term CSIQ will continue its growth in Canada and Japan, where demand for solar PV is growing. Japan in particular is becoming a key market: it currently has a 606 MW backlog in the country, up from just 329 MW around this time last year. This increase in the company's project pipeline in Japan more than makes up for the decrease in the US project pipeline of 100 MW. (Source: PV-tech)
The company's focus on utility-backed projects moderates financial risks, providing stable and predictable cash flows generated by these large projects. The company generates about 50% of its revenue from such projects. In the near term, utility-backed projects will be the largest source of growth in the solar industry.
Investment Risk Factors
Despite strong performance of late, CSIQ has an elevated forward P/E of 10.4, twice as high as the P/E ratio of 5.28. This is because earnings are expected to slow over the next year by 8.7%. However, keep in mind that earnings grew 552.4% this year - a difficult rate to sustain.
Anti-dumping duties of about 30% in Europe and the US are affecting the company's stock price of late and putting a slight damper on future growth prospects. However, I believe that this pessimism has already beaten down the stock price, which is in or near oversold territory. I expect profitability to return to recent levels as the global supply of solar panels begins to dry up due to strong global demand. As a manufacturer and project developer, CSIQ will benefit from higher panel prices.
Other Growth Opportunities
The company is diversifying is offerings by introducing its own battery storage system. The ground-mounted system, mounted on casters, will have an energy capacity of 5.76 kWh, work for 4000 cycles, and weigh 155 kg. This product may be strong competition for Tesla's Powerwall in markets such as Canada and Japan, where CSIQ has a strong foothold. CSQI has intentions to move into the residential solar market, where long-term growth prospects are enormous. There is an opportunity to combine its solar panels with its new battery for residential installations.
Finally, the company recently announced the formation of a Yield Co and the acquisition of Recurrent Energy. Recurrent has increased Canadian Solar's project pipeline, and the Yield Co will help drive consistent cash flows into the future.
Based on the past success of CSIQ and the medium- to long-term growth prospects of the company, the stock is undervalued at current price levels. Continued growth in its utility-scale offerings and future diversification into residential projects will fuel the growth of the company, cementing its position as a key player in a rapidly growing industry.
Disclosure: I am/we are long CSIQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.