The share price of Canadian Solar Inc. (CSIQ, Financial) has pulled back to trim gains made following the latest earnings report released last week. Shares of the company gained nearly 19% late last week after it beat earnings estimates.
The post-earnings excitement appears to have dissipated over the last few trading sessions, however, with the stock falling more than 12% off Thursday’s peak. Canadian Solar delivered adjusted earnings of $1.04 for the most recent quarter, which smashed analyst expectations of 45 cents. The company’s top line of $919 million also outshone the consensus estimate of $865 million.
Why was the bounce short?
Investors reacted positively to the earnings beat. However, when you dig deeper into the company’s bottom line, it appears earnings are being squeezed. In the prior-year quarter, Canadian Solar posted earnings of $1.61 per share. As such, this year’s earnings represent a significant drop of about 42.54%. This is despite the top line ticking 2.07% higher.
The company’s operating income also edged lower, coming in at $111.43 million. This was down from $136.56 million, which again shows that Canadian Solar’s operating expenses had a huge impact on the massive decline in the bottom line.
Chairman and CEO Shawn Qu remains optimistic about the immediate future. Canadian Solar is implementing a new strategy to try to boost profit margins in a highly competitive industry. Things appear to be taking shape according to Qu’s remarks.
During the earnings conference call, he said that he was “pleased with the strong 2019 results, as revenue and gross margin were both ahead of expectations. The strategic decisions we made in R&D and production capacity helped us achieve one of the industry’s highest margins, as we build upon our strong brand and maintain pricing power.”
Nonetheless, it looks like it could be several quarters before the earnings curve begins to look up again. The company’s earnings per share are expected to drop through next year. Earnings are expected at about $2.69 per share for the year, down from about $3.44 for 2020. This explains why the post-earnings optimism faded so quickly.
The long-term outlook remains positive
While the intermediate future promises to be relatively bumpy, the long-term future of the company remains strong. The renewable energy market is only going to grow amid an increasing shift toward clean energy.
One of the biggest challenges that the companies operating in this space face are the high costs at the early stages of product development. Canadian Solar has invested heavily in research and development since 2017. Last year, it increased the research and development expenditure to $47 million from $44 million a year ago.
The company also revealed that it will be increasing annual photovoltaic (PV) module production capacity by about 3,000 megawatts by the end of 2020. It will also expand cell production by 500 megawatts. This will continue to boost top-line growth in the intermediate future and put the company in a strong position to capitalize on the global industry growth.
Canadian Solar has subsidiaries in 20 countries and regions spread across six continents, including Africa, one of the world’s most promising markets for green energy companies.
Conclusion
In summary, Canadian Solar appears to be experiencing some bottlenecks in its intermediate growth aspirations. However, with one of the industry’s best gross margins, all it needs to do is sort out its operations.
The company’s product pipeline also looks promising after increasing production capacity for cell and photovoltaic modules. Its investments in research and development over the last several years could begin to yield more results in the near term as clean energy adoption increases.
Disclosure: No positions.
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