After hitting a low of below $20 per share earlier this year in January, which was less than half the value of its 52-week high mark, the stock of Canadian Solar Inc. (CSIQ, Financial) is again trading near its all-time high. Having gained about 50% in the last year and close to 35% in the last 3 months, that compares favourably with First Solar Inc. (FSLR, Financial) that has gained just over 10% in the last 3 months and is more than 5% lower than its price a year ago, or SunPower Corporation (SPWR, Financial) which has gained over 15% in the last 3 month but is just a bit lower than the price 52 weeks ago. But is the stock performance of Canadian Solar a reflection of strong fundamentals?
The renewable advantage
A supporting fundamental factor is the increasing demand worldwide for renewable energy, and solar power is starting to see a big uptick in demand from big developing economies like China and India. According to estimates from Bloomberg New Energy Finance, the solar power industry is likely to install about 57.2 GW of power generation in 2015, up by more than 40% from the 40 GW installed in 2013. This trend is likely to continue in the years to come.
Existing and potential markets
For Canadian Solar, most of the existing markets it operates in are developed economies. In the last quarter, almost half the company’s revenues came from North America. Led by Japan, Asia accounted for a third of the revenues and the company seems to be well aware of the potential for growth in that continent, keeping in mind China and India. Most of the rest of Canadian Solar’s revenues came from Europe and Latin America, and the company is doing what it can to expand its reach across the globe.
Pricing and demand
According to an analyst, solar prices drop by half every two years and the current low prices are driving up demand. While the drop in prices affects the gross margins for Canadian Solar (they declined to 17.8% in the last quarter), the higher demand offsets the lower margins. The company shipped more modules last quarter than it had planned to, and expects a potential disruption in shipping in the second half of this year due to shortage of modules, given the excessive demand. Given how things stand and the company’s recent acquisition of Recurrent Energy that has increased its solar project order book to over 8 GW, Canadian Solar seems to have no trouble finding demand for its product.
YieldCo plans
The company plans to launch a yieldco vehicle later this year or next year. As a strategic shift from selling completed projects up front, this business model will be more profitable for Canadian Solar and will provide more stability to the revenue stream. The company plans a separate IPO for the yieldco.
Conclusion
One of the concerns about the company is the amount of debt it carries, almost twice the cash on its books. That limits somewhat its expansion plans, but Canadian Solar seems to be managing quite well despite that. Having most of its manufacturing based in China helps keep costs low and also to compete with other Chinese manufacturers. With a yieldco coming, earnings should increase. The demand for solar power is not about to let up any time for the next few decades, and as one of the stronger players, we recommend a BUY on this stock.
