Shares of Canada-based clean energy company Canadian Solar Inc. (CSIQ, Financial) gained more than 13% on Friday after an analyst rating report from GLJ Research tipped the stock to outperform expectations in the coming months.
It has now added more than 145% to its market value since bottoming on March 16. Overall, shares of Canadian Solar are up 44% this year, which clearly outperforms the S&P 500 Index's gain of about 7.6%.
The company has received several analyst ratings before, but GLJ focuses on the solar sector. It looks like investors took its latest rating to heart.
Canadian Solar is one of the biggest players in clean energy across the globe. It is also one of the few solar power companies that are consistently turning a profit after overcoming the exceptionally high cost of inception and production.
Analysts forecast its bottom line will continue growing through 2020 and 2021, with an earnings per share increase of about 18% and 43%. As such, there is more to Canadian Solar's price rally than today's positive analyst rating.
Why Canadian Solar could be undervalued
From a valuation perspective, shares of Canadian Solar trade at a lucrative price-earnings ratio of 7.58. This compares to competitor First Solar Inc.'s (FSLR, Financial) price-earnings ratio of 86.58 and SunPower Corp.'s (SPWR, Financial) equivalent of 347.63. JinkoSolar Holding Co. Ltd. (JKS, Financial), which gained 7.54% on Friday, trades at a slightly more lucrative price-earnings ratio of 6.58, while Sunrun Inc.'s (RUN, Financial) bottom line for the trailing 12 months has yet to turn positive.
Based on these valuation multiples, Canadian Solar appears to be competitively priced. This will get investors excited ahead of the earnings results for the next two quarters. The company is also reportedly planning an initial public offering in China, which will boost the demand for its shares.
The solar photovoltaic producer could also benefit significantly from its low cost of production according to the GLC research report, which also pointed to the company's strong pipeline of orders that will serve as a strong revenue boost.
In another report by Zacks Equity Research, analysts pointed to the changing energy trends, which could work out in favor of Canadian Solar. The report highlights the increasing underperformance of fossil fuels stocks as compared to their clean energy counterparts. Some of the largest players, like U.K.-based BP PLC (BP, Financial), in the energy sector are already beginning to adapt their businesses to a model that helps them to transition to clean energy.
BP has said that it intends to become a net-zero energy emissions company by 2050. This includes, among other strategic moves, acquiring clean energy startups as it slowly phases out its fossil fuel-reliant business unit. The Netherlands' Royal Dutch Shell PLC (RDS.A, Financial) has also started to transition to clean energy.
From one perspective, this looks like a potential competition for Canadian Solar and its peers. However, it also implies that the clean power sector will experience tremendous growth in the coming years as more people embrace renewable energy sources.
In summary, Canadian Solar's latest spike in price could be a clear indication of things to come amid its strong business moat, low cost of production and a rapidly growing industry.
Disclosure: No positions in stocks mentioned.
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