Canadian Solar: Looking Past the Short-Term Pain
Canadian Solar (CSIQ) was not doing well this year and the company soured investor sentiments by reporting a disappointing guidance for the third quarter. As a result, the stock fell considerably and is currently trading near its 52-week low. Interestingly, its second-quarter results were not so bad and beat the earnings estimate by a significant margin.
Its revenue for the quarter fell 26% from a year ago period to $636.7 million, while earnings declined to 31 cents a share, compared to an EPS of $1.04 in the same period last year.
A change in the business model could be a tailwind
Although its earnings declined considerably, but investors must not forget that the company is transitioning from built-to-sell to build-to-hold. It means that Canadian Solar will now build, own and operate renewable power plants. Additionally, it is all set to launch its renewable energy YieldCo, which is also a significant transition that weighed on its financials in the previous quarter. As a result, its numbers were a bit marred for the quarter but these initiatives will benefit the company in the long run.
In addition, the company has a strong customer base in key markets such as Japan, U.S., India and China, with each of these markets contributing at least 100 megawatt of shipment respectively. For instance, its products are highly recognized in Japan, where its sales exceeded 200 megawatt in the previous quarter. It has similar performance in other areas as well.
Also, it has developed funding partnerships in China to support its project developments in the region. This is an example of its conservative growth strategy, which will allow it to stay on course for profitable growth in both good and bad market environment.
The YieldCo is a positive move
Canadian Solar is on track to launch its renewable energy Yield Co as the company believes it to be the preferred way to securitize its utility-scale solar portfolio in low risk OECD countries such as U.S., Canada, Japan and the U.K. This strategy is in line with its ongoing initiatives and strong cash position, which will allow it to hold its high quality solar project assets on its balance sheet if necessary for the right window to launch such a YieldCo.
Talking about its strategy, CEO Shawn Qu said, “We believe that our project allow us to realize our reasonable development margin even if we sell these projects to our traditional customer base. We have always been more conservative for projects in emerging markets and we will continue to do so.”
Going forward solar PV installations are expected to increase tremendously. As per GTM Research, “The cumulative global market for solar PV is expected to triple by 2020 to almost 700 gigawatts, with annual demand eclipsing 100 gigawatts in 2019. Solar demand will likely be almost entirely market-based in 2020; a dramatic shift from 2012 when almost all demand was premised on direct incentives.”
Looking past the short-term pain, Canadian Solar is making impressive moves to strengthen the business. Though its forward P/E doesn’t look impressive at 5.53 compared to a trailing P/E of 3.61, indicating suppressed earnings in the coming months, analysts anticipate its earnings to grow at a CAGR of 12.5% in the next five years, which is quite encouraging. Moreover, its valuation looks cheap at current levels as it has a P/S multiple of 0.26 as compared to the industry average of 1.70. Therefore, Canadian Solar could be a good long-term bet.