Canadian Solar (NASDAQ: CSIQ) is a solar energy company that has had a difficult time these past few years. The solar industry is one of the fastest growing sectors in energy production and Canadian Solar has an impressive position in this industry. On top of this, Canadian Solar currently has a P/E ratio of just over 5. This combination of the rapid growth of the solar industry and Canadian Solar's low valuation, as we will see, make the company a strong investment at the present time.
Canadian Solar is a publicly traded company that provides manufactured solar photovoltaic modules and turn-key solar energy solutions. The company was founded in 2001 in Canada and is a global company with operations in 18 countries and 6 continents. With a market cap of $0.73 billion, Canadian Solar is a good sized solar company and comparable to other major solar companies like SunPower (NASDAQ: SPWR) and First Solar (NASDAQ: FSLR).
Canadian Solar has had a difficult time over the past few years. Like all other solar companies, Canadian Solar had a difficult time until late-2012 when the company's stock price bottomed out at just over $2 per share. From that point, the company's stock price peaked twice in 2014 and once in mid-2015 at roughly $40 per share. Since then, the company has had a difficult time with its stock price dropping to present lows of just over $12.5 per share.
Global Solar Growth
Now that we have an overview of Canadian Solar along with a discussion of the company's recent stock performance, let us begin by discussing the global solar markets.
In 2008, the solar markets were young, and the solar market experienced rapid growth from 2008 to 2015 at an annual growth rate of 38.1%. Now that the solar markets are noticeably more mature, growth is expected to slow down. From now until 2022, the solar markets are expected to roughly double size at an annual growth rate of 8.3%. The doubling of the industry will me a lot of new production, new production that Canadian Solar will benefit from.
Solar Energy Future Growth - Canadian Solar Investor Presentation
As we can see here, not only is the solar market incredibly young but it is rapidly growing. The total installed capacity of solar panels is anticipated to grow to 1.8 terawatts by 2030 or almost 9 times the present installed capacity of 0.2 terawatts. Industrialized nations, especially, are looking to turn towards solar energy to decrease the impact of climate change. With minimal present solar penetration in these markets so far, these markets all have enormous room for growth.
And with this enormous room for growth comes the potential for massive earnings. Canadian Solar is a major company in the solar industry. And with the average new annual installed capacity from now until 2030 equal to roughly a third of the entire installed capacity, we can see here that Canadian Solar has enormous room for growth. This should bring Canadian Solar massive additional earnings potential.
And not only is the renewable industry growing itself naturally, but the solar industry has the room to steal market share from other forms of energy production. Since 2011, after the Japanese nuclear crisis, nuclear power production in the world has been decreasing rapidly. Coal is becoming less popular as a result of the massive amount of pollutants that it generates. The shrinkage of this industry should provide additional future growth for the solar industry.
Canadian Solar Overview
Now that we have a detailed overview of the solar industry and the rapid growth it should experience in the coming years, let's talk about Canadian Solar as company.
Canadian Solar Overview - Canadian Solar Investor Presentation
As we saw above, Canadian Solar was originally founded in Ontario, Canada in 2001. The company was first listed on the Nasdaq in 2006 and has over 9000 employees in 18 countries. At the same time, the company has shipped more than 17 gigawatts of solar modules and has more than 2.3 gigawatts of solar power plants developed. This means that Canadian Solar has grown to be the second largest solar company in the world.
On top of that, Canadian Solar has managed to continue to earn cash. The company had 2015 revenue of $3.5 billion from 4.7 gigawatts of shipments, which it turned into net income of $0.17 billion. Given Canadian Solar's market cap of just $0.73 billion, that means that Canadian Solar is trading at an incredibly low P/E ratio of just 4.3 based on its 2015 net income.
However, not only is Canadian Solar cheap, but it has a strong position in a rapidly growing industry. As we saw above, roughly 67 gigawatts of solar power were installed worldwide in 2016 of which the company plans to install roughly 7.65% of that. That means that from now until 2030, Canadian Solar, assuming it can hold its market share, will be installing roughly 122 gigawatts or roughly 7 times the solar power it installed from 2001 to 2015.
Canadian Solar Pipeline
Now that we have a detailed overview of the solar markets and of Canadian Solar including the company's position in the rapidly growing solar markets, it is time to move on to discussing Canadian Solar's future income, through its pipeline.
Canadian Solar Utiltiy Pipeline - Canadian Solar Investor Presentation
So far, Canadian Solar's total utility scale solar power installations have totaled roughly 2 gigawatts. However, Canadian Solar is looking to move rapidly into this business with a total project development pipeline of 9.5 gigawatts of which 2.0 gigawatts are contracted already or in the late stage of the pipeline. Canadian Solar also owns and operates 948 megawatts of solar power plants with a resale value of $1.4 billion and a low double digit profit margin contribution.
Solar power plants are a long-term asset. Unlike a coal plant or natural gas plant, which constantly need new fuel to be inputted, solar power plants can produce electricity consistently for decades. That means that Canadian Solar can either try and sell its existing solar plant assets for $1.4 billion, or twice the companies present market cap. Or it can continue to earn a very respectable profit margin by operating its assets, something it has decided to do.
Currently, Canadian Solar is focused on significantly increasing these assets. Should the company develop all 9.5 gigawatts of its pipeline, this will provide the company with an astounding $14 billion of solar power plants it owns and operates. At the double digit rates of profit margin, that means carrying out this pipeline could result in a version of Canadian Solar earning more annually than its present market cap.
Canadian Solar Japanese Business - Canadian Solar Investor Presentation
Looking specifically at Canadian Solar's operations in Japan and we get an overview of the growth potential of the company's business. Japan, in particular, is looking to new sources of renewable power after the devastating 2011 earthquake and tsunami. Currently, Canadian Solar has just 22 megawatts of projects in the country. However, the company has 597 megawatts of projects in its late stage pipeline with an astounding 191 megawatts in construction, almost 10 times the company's present size of operations.
As a result, Canadian Solar anticipates, in 2017 alone, increasing the size of pipelines owned and operated by almost 6 times compared to its present operations. In fact, Canadian Solar is growing so rapidly in Japan that it is considering making a REIT traded on the Japanese stock market. Canadian Solar will sell its solar utility plants to this REIT to earn quick capital and these plants will then earn cash over the long-term for their investors.
Canadian Solar Financial Position
Canadian Solar Manufacturing Capacity - Canadian Solar Investor Presentation
Canadian Solar has been rapidly increasing its manufacturing capacity to take account of the growing solar market. Since 2012, the company's wafer manufacturing capacity has increased by a factor of 5, mainly as the result of a major capacity addition in H2 2016. At the same time, the company's cell and module capacity have continued to grow rapidly.
This growth has allowed Canadian Solar to increase module shipments at an incredible CAGR of 80.1% and become the 2nd largest energy solutions company by revenue. Canadian Solar's ever increasing stake in the market, a stake that has allowed the company's revenue to continue to increase, shows the company's impressive financial position and helps highlight why the company is a strong investment.
Canadian Solar Costs - Canadian Solar Investor Presentation
At the same time, Canadian Solar has been rapidly reducing costs as an industry leading manufacturer. Coal and Natural Gas are two of the largest sources of electricity in the United States. Presently, coal costs approximately 3.23 cents per kilowatt hour and natural gas costs approximately 4.51 cents per kilowatt hour. Most areas in the United States average 4 peak hours of solar production daily or 1461 peak hours per year.
In the 3Q 2016, Canadian Solar anticipates total costs for power plants of $350 per kilowatt hour decreasing to $250 per kilowatt hour by 4Q 2020. That means that at present prices, solar panels will be profitable over coal after being installed for 7.4 years. By 2020, this time should decrease to just 5.3 years. Given that solar panels last for decades, this shows how cost effective and competitive solar is as an energy source at the present time.
This does not even count the benefit that solar panels pose for the environment over coal or natural gas energy.
Canadian Solar Earnings - Canadian Solar Investor Presentation
This shows Canadian Solar's net income during the present and rapidly growing solar environment. The company's 2016 net income will likely be lower than that from 2015 as a result of growing costs. However, the market is continuing to increase, and Canadian Solar will need to get its costs under control. This should help to increase Canadian Solar's future income and shows how the company is a strong investment.
Canadian Solar has had a very difficult time for its stock price these past few months. At the same time, the company has seen its net income decrease slightly. Despite these things, Canadian Solar is a major company in a rapidly growing industry. The solar industry is expected to increase at the high single digits from now until 2022. Canadian Solar is the second largest company in the solar industry with significant growth potential.
At the same time, Canadian Solar is taking advantage of the rapidly growing solar utility markets. The company's present solar utility pipeline is ten times the company's present installations and valued at approximately $14 billion. At the same time, these installations are continuing to throw off double-digits of profits. On top of this, costs in the solar market are decreasing but that growth is expected to slow down. That means companies will be more likely to invest in solar now and use Canadian Solar.
As a result of Canadian Solar's strong market position combined with the growth of the solar industry, we can see how Canadian Solar is a strong investment at the present time and my top renewable recommendation for 2017.
Disclosure: I am/we are long CSIQ, FSLR, SPWR.
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.