Canadian Solar Inc. is a global solar power company based in Canada, specializing in the manufacturing of solar panels and energy storage solutions. Operating in a highly cyclical and commoditized sector, the company’s products often lead to volatile swings in share price.
The cyclicality of the sector arises from rapid technological evolution and the significant reinvestment of cash flows into added capacity during favorable market conditions. This scenario leads to substantial output growth and stock price appreciation, as observed in 2020 and 2021.
However, when interest rates rise above the expected energy savings from solar installations, the market for solar panels softens, inventory accumulates, and stock prices decline.
Recent Performance and Outlook
Canadian Solar experienced significant growth during the pandemic boom, with its stock reaching an all-time high of $127.04 in November 2022. However, as interest rates rose and demand softened, the stock has plummeted below $60 recently.
Despite these challenges, the company remains fundamentally strong, historically achieving high revenue, earnings, and free cash flow growth.
Financial Performance and Guidance
The first quarter of 2024 marked the third consecutive quarter of revenue decline for Canadian Solar, with Q1 revenue at $1.33 billion, a decline driven by lower sold volume of solar panels amid reduced demand. Earnings per share (EPS) for Q1 were $0.19, up from a disappointing Q4, but significantly lower compared to early 2023 levels.
As a result of macroeconomic headwinds, management has revised the forward guidance, lowering the 2024 solar panel shipment target from 42-47 GW to 35-40 GW.
Consensus forward EPS estimates for 2024 now stand at $2.12, indicating a year-over-year decline of 45%. While analysts are optimistic about a significant earnings rebound in 2025, such projections should be viewed cautiously given the inherent cyclicality and unpredictability of the sector.
Valuation
Canadian Solar’s current stock price around $19 per share translates to a forward P/E ratio of 9x based on 2024 EPS estimates, below its historical average of approximately 12x. However, given the cyclical nature of the industry, a more insightful approach is to evaluate the company based on the sum of its parts.
Canadian Solar owns a 62% stake in its Chinese subsidiary, CSI Solar Co., which has a market cap of around $7 billion. This ownership stake alone is valued at approximately $4 billion, significantly higher than Canadian Solar’s market cap of $1.2 billion.
This indicates a substantial undervaluation, suggesting that the stock could potentially triple and still trade below the intrinsic value of its holdings.
Risks
- Demand Slowdown: The primary risk is the potential for further softening in demand for solar panels, exacerbated by prolonged high interest rates or an economic recession that curtails consumer spending on non-essential home improvements.
- China Risk: Despite its name, Canadian Solar is heavily integrated with China, where most of its manufacturing occurs. This exposes the company to geopolitical risks, transparency issues, and regulatory challenges associated with Chinese operations.
- Concentrated Ownership: CEO Dr. Shawn Qu owns 20% of Canadian Solar, which could align management and shareholder interests but also poses the risk of a potential buyout attempt, as seen in 2017.
High-Risk but High-Reward
Canadian Solar presents a high-risk, high-reward investment opportunity, driven by significant undervaluation and the potential for substantial gains during the next industry upcycle.
Despite the inherent risks, including demand fluctuations, geopolitical concerns, and ownership concentration, the current valuation justifies a speculative buy rating. Investors should consider accumulating a small position in Canadian Solar, prepared for potential volatility while awaiting the next favorable market cycle.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
