The current market evaluation and third-quarter results for the US solar companies generated an opportunity to rediscover an undervalued situation in market capitalization of Canadian Solar (CSIQ). There are a number of misconceptions, directly and indirectly contributing to this discount. Those factors include the company’s condition in Japan, influence of oil price on solar adoption, impact of the global, or most importantly, China’s economy and finally the outcome of the US tariff.
Canadian Solar plans to have 600MW of projects in Japan by end of 2014. Since FiT changes are expected, existing, grid-approved projects will gain in value, benefitting future sales. Canadian held more than 10% of the Japanese module market in 2013 and can use its well-established position in the country to seize more projects and have internal cash flow to bring them to production. More cash flow can be unlocked with yieldco structure owning part, or all, of Japanese portfolio; such a company could be listed in Tokyo. The market take on recent events in Japan misunderstands Canadian’s position, despite the company remaining confident on the module and project development side.
Oil liquid products and petroleum coke used for the electricity generation in the US was 0.28% in 2013. Use of oil liquid products for electricity generation globally is about 5%. There are local markets, like the Middle East or Japan, where oil has a lot larger contribution in electricity generation. Saudi Arabia is as much as 40%, and Japan is at about 25%. Many consider alternative energy sources as unsound during the period of cheap fossil fuels, but the argument that oil is relevant to solar growth lacks merit. The balance of cost will favor fixed price in solar over fluctuation of LNG and oil, particularly in Japan with the price of fossil fuels being more than four times those in the US. In the Middle East, solar can help increase oil exports, and become a reason for more of cheap oil.
Outside of safety and security risks, which are considerable, even new nuclear plants cost more than solar. According to Xavier Barbaro, chief executive of French company Neoen, which is procuring Canadian’s modules for the development of a 300MW solar park, Hinkley Point C nuclear plant project in Britain is more expensive: "We are below the price of new nuclear electricity in Britain. So the parity between nuclear energy that is costing more, and solar, which continues to drop, is happening now, in 2014.”
There is talk of China’s economy slowing down, but there is no reason to believe that solar in China will slow down. Solar in China is not being built as a consequence of the economy’s growth. Moving to solar is an essential part of the government’s objective to clean the air pollution along the need for clean energy. Canadian is looking to have at least 290MW of solar plants developed in China by the end of the year, in addition to the 77MW already in operation. The 2015 roster is suggesting additional 1GW. The superb entry of SunPower (SPWR) into China not only legitimizes China as a destination for foreign investment, but emphasizes the amount of asset creation and future revenue streams for a company like Canadian.
Canadian is also building a global footprint in emerging markets. The 146MW module supply to Honduras and the 114MW solar plant development in Brazil are examples that the company is contesting stereotypes about solar boom involving a single country’s desire for renewable energy. Dr. Shawn Qu, the company’s Chairman and CEO, during a meeting with industry leaders in Wuxi, spoke about 500MW module expansion, not only for China, but having emerging markets in mind. Such an expansion, if in Brazil, could support both local and South American demand, but Canada is also an option. During the Ontario government trade mission to Jiangsu, the company obtained business contracts worth $70M to create more jobs in the province while representing Canadian business in China.
More global footprint and potential business expansion could as well come from Middle East. During Canada’s Ministry of International Trade mission to Saudi Arabia, the company also represented Canadian business in discussions on the Kingdom’s plans for $7.4B worth of renewable projects, in aspiration to preserve oil for exports. More exports would allow Saudis to garnish a larger market share and in the process, encourage lower prices, a scenario conflicting with cheap oil theory and impact on solar.
In the US, existing tariffs have dislodged a lower-tier supply of modules, but that condition is not affecting Canadian. Our analysis indicates that the company should have record sales in the US for the coming quarter. A large portion of the company’s business in the US constructs plants, selling modules as part of the package. This helps to protect margins; in addition, Canadian is also the largest solar module manufacturer in North America. If cells used in modules assembled in Ontario do not originate in Taiwan or China, they are tariff free for the US market, and they are not part of the EU minimum quota, even with Taiwanese components.
On Wednesday, the company will report third-quarter performance. The company closed sale of three solar plants to TransCanada, for a total of five transactions in Canada alone. The guidance given by the company had only four plants listed in the Q2 news release; therefore, we expect the results to beat the revenue guidance by $16M to $826M, with a gross margin of 20%. We also expect an increase above estimates in net earnings per share, with $1.25 to $1.35 modeled on 60M shares. We include potential forex losses of around $9M from the $7M gain in Q2. We also stipulate $10M in tax expenses versus the tax benefit of $8M from Q2.
It is also important to note that fourth-quarter guidance can be equally strong. In Canada, there are eight solar plants slotted for commercial operation date (COD) during Q4. We also believe that projects reported on a percentage of completion will have greater MW recognized in Q4. We expect that Canadian will offer large third-party module shipment guidance, which has a chance to be a record high.
Until now, Wall Street’s market capitalization of solar companies offers billions to SunEdison (SUNE), First Solar (FSLR) or SunPower, but discounts Canadian Solar. Canadian’s operational metric should help analysis and offer proper evaluation closer to other North American companies. If an expectation of $1.25 is met, trailing 12 months (TTM) for earnings will be at $2.65 per share. Price-to-earnings ratio (PE), using Friday’s closing of $30.27, will be 11.4. This is a deep discount compared to others.
In comparison, in the same statistic SunPower is valued at a PE of almost 20, earning $1.54 in non-GAAP earnings. Upon earning $0.61 per share in Q3, First Solar’s TTM is at $2.64, but at a price of $50.29, the market is trading the shares at PE of 19. Guidance for the last quarter of the year has First Solar bound to remain at the same range and predicts a drop for SunPower. Canadian should increase its 2014 earnings to at least to $3.50, making the company the most profitable solar business not only in North America, but globally.
