FSLR - Canadian Solar Can Offer Great Value For The Long-Term Investor

Summary

• I believe that at current valuations Canadian Solar can provide a lot of growth for investors looking to get into the solar sector.
• With a 57% increase in revenues YoY, CSIQ is maintaining the trend of rapid growth in a hot industry.
• With positive outlooks for the entire sector, Canadian Solar is ready to become one of the largest players in the space.
• Canadian Solar is, in my view, at a great price to start a position. With a drawdown from the year's high of $47 per share, I believe the risk/reward is currently very favorable.

Q3 Earnings

On November 22, 2022, Canadian Solar ( CSIQ ) reported their Q3 earnings report , keeping up the trend throughout the year so far of growing at an incredibly fast pace. The most notable point was revenue, which was up 57 % YoY - an increase that can be attributed to solar modules seeing much higher demand compared to last year, up 62% YoY.

The largest increase the company saw was for its net income, up 123% on a YoY basis. This was despite challenges such as lockdowns in China where the company gets a substantial sum of their parts from, but also an increasingly more cautious economic environment. The CEO Dr. Shawn Qu commented on the company's continued plans forward and the ability to increase sales capacity and revenue, saying “We continue to execute our long-term strategy and build on our competitive position with a further expansion of our upstream capacity and increase level of vertical integration in our solar manufacturing capacity”.

In the Q3 report the company also maintained their outlook for a rapid increase in revenues for their Global Energy segment. This is perhaps the most exciting segment for me as it serves as a good future indication for how much revenues the company could possibly be making.

Canadian Solar projects to achieve an average 50% annual increase in sales until 2026. This would bring the total segment revenues up to approximately $7 billion, given today's sales. This segment of the company is what would become the backbone and foundation for their future revenues. They rely on long-term contracts here where they are responsible for managing solar projects and then take a royalty from this. This is a scalable and profitable segment that Canadian Solar is focusing heavily on, currently making a 47.1% gross margin.

With gross margins coming in at 18.8 % the company surpassed their own forecasts by quite a lot. In Q2 Canadian Solar expected to land somewhere between 15% and 16.5%. I believe a positive surprise like this gives great confidence in the company's ability to keep increasing the net income and, in turn, EPS.

Company Financials

Taking a look at the financials of the company, I can see some healthy signs. First off, the company holds almost $2 billion in cash. With this amount they can pay off their rather large short-term debt of $1.2 billion and almost all its long-term debt as well. In my view, this is one of the first things to check on a company's financials - are they in a secure spot to not fall flat on paying back debt.

Diving deeper into the debt that the company holds, they took most of this in 2021 when the interest rates were lower. The long-term debt I believe has most likely an interest rate around 3-4%. The short-term debt has a moving interest rate between 5% and 6%. Canadian Solar took on a large sum of debt, but a large part of that has a set interest rate that they can comfortably manage to pay off.

The company's total assets add up to $8.6 billion with their factories and properties included. With assets almost 1.3x current liabilities, there would be a significant amount of shareholders equity left if the company ever would come under bankruptcy.

With a low price to book value of 1.3, you are essentially buying the company's assets without a high markup compared to other popular tickers in the space. I can also see that this number is going down dramatically. CSIQ is rapidly expanding inventories to further satisfy the demand for its product. In my opinion, they can afford to have this rapid expansion without it digging too much into earnings as the time spent as inventory is rather short.

Something I am watching out for is the rate that the company is paying off its debt. If I continue to see negative cash flow with an increase in outstanding shares that will worry me. It's a reckless way of operating in my opinion. The company reiterated in the recent earnings report however that they see themselves in a healthy spot, financially. CFO Dr. Huifeng Chang was quoted saying “while maintaining a healthy balance sheet to support our long-term working capital”.

Expansion Challenges

I think the largest challenges the company will be facing comes from supply chains and potential lockdowns. Canadian Solar gets a large part of their supplies from China. With the risk of lockdowns, CSIQ could face tougher times trying to get their modules manufactured and shipped out to customers.

So far however the company has seen little impact in terms of getting their supplies and equipment; the rise in the cost has been the challenge though. With Chinese suppliers marking up their products, Canadian Solar is faced with paying a higher price to be able to make their solar modules. I think this should stabilize however with time and any drastic increases in prices aren't on the horizon.

With so many tailwinds for the entire solar energy sector it shouldn't be difficult for Canadian Solar to capitalize off of this and secure more contracts and projects. The ownership of the company could perhaps weigh slightly on the company. Since Canadian Solar has ties in China, this could cause some potential customers to back out because of risks being linked to China. However, for me it's a bit hypocritical as almost every solar company out there right now is getting supplies from China.

Other Players In The Space

One of the biggest draws for me to Canadian Solar compared to some of the other players in the space is the fair valuation. The solar energy space is filled with new up and coming companies.

Canadian Solar does face competition from companies like JinkoSolar (JKS), MaxLinear (MXL) and First Solar (FSLR). These are some of the smaller players in the space who try and achieve rapid growth in a short amount of time. They operate in a similar manner, in that they offer solar modules that they then are responsible for maintaining and charge a royalty for that.

I’ve spotted NextEra Energy ( NEE ) to be one of the largest direct competitors of Canadian Solar. It's a much more diverse company that does not only focus on solar energy, but other energy sources too like wind or natural gas. The challenge that Canadian Solar has here is to secure more and more contracts and take market share away from these other companies.

Company's Growth Outlook

With an industry where a large amount of money is flooding in to support ambitious projects and new technologies, I think Canadian Solar has a proven track record of growth and a realistic future outlook.

Until 2026, CSIQ expects to be able to generate 50% annual sales growth for their modules segment. This is the largest part of the company and accounts for a vast majority of the revenues.

But what should be noted is that the annual 10-year growth rate is projected at 28%. With so much demand to adjust for more environmentally friendly energy sources, Canadian Solar sees plenty of tailwinds to successfully achieve these sales goals.

Valuing The Company

Canadian Solar has a rather simple business model, where they sell solar modules in projects and also manage some of the projects they are involved in. Once these projects are finished, CSIQ takes a royalty for maintaining them. It's a highly scalable business and once these projects have been established they will generate income for many years to come. The likelihood of any of these projects being put down is low as there is so much social pressure on governments and businesses to have a green energy source.

With projections of generating almost $7 billion in 2022, and only having a market cap of $2 billion there seems to be a discrepancy between the revenue and current price. I expect the company to grow their revenues by 20% each until 2027. This goes below CSIQ's own expectations. With growth margins like this, the company deserves a higher valuation too.

At a current P/E of 14x, Canadian Solar doesn't seem massively undervalued. But taking into account that the company might almost double their revenues in 2023 compared to 2022 the P/E goes down to 8x. In 2027, I expect the EPS to be $7.9. This number takes into account that there might be some share dilution along the way as the company tries to raise capital to further fund new projects.

Taking a conservative P/E multiple of 12, I land at a price target of $94.8. This would be an increase of 172% compared to current prices. If you believe that the company can maintain their targets of sales and still maintain their gross margin, then this number is not unrealistic. I see the company having a very favorable risk/reward. It's a proven business with little to no headwinds except for possible supply delays. Canadian Solar won't have to work hard to sell their products as there is and will continue to be a massive demand for more green energy sources.

I believe that the company will be able to steadily increase its net margins throughout the next 5 years. With greater net margins I believe Canadian Solar will also be able to increase the EPS at a good rate. As an investor, this would provide market-beating results for the capital I have put in.

Valuing The Competitors

Looking at what the competitors are getting valued at and how they are performing is incredibly important to me when investing in a company. Perhaps the first company you are looking at is too overvalued, and a competitor offers better risk/reward ratios.

Above are some of the ratios I like to look at to get a quick idea of how the company is doing. For me, CSIQ has the healthiest ratios here. It grows at a fast pace, and like I have said before, it projects to keep this up. It also has the most fair valuation in terms of p/e and its growth. To me, a good valuation is more important than the amount of growth a company has. I think MXL has good margins, but the revenue is projected to flatline in a few years. I see that JKS has great revenue growth , but horrible margins, barely making the cut to be profitable.

Risks With Canadian Solar

With all companies there are risks that come along. You are entrusting your money to other people to do their job and do it really well. With Canadian Solar, the largest risk is not keeping up a good gross margin. If the supplies that they are buying are becoming too expensive and it digs too much into earnings, then the stock could become overvalued rather quickly.

Reading what the company is saying about supply chain issues and the cost of operating will become more and more important going forward. Currently, the management isn't saying anything that could worry me enough to not invest money in the company.

Conclusion

To conclude, I see Canadian Solar to be one of the most fairly valued solar companies out there right now. With such massive growth projections the return on the investment can, in my opinion, match that. At the current price of $34, the risk/reward ratio is really favorable for anyone looking to invest their money for the long term. I believe the company could present a market-beating growth rate and because of that I hold a position in the company. With a smaller market cap you should expect there to be some volatility along the way. But unless there is any major shift in the investment idea with Canadian Solar then I am not worried about being invested in the company.

Given the unstable nature that is the current stock market, it's not unrealistic to see a future drawdown that could drag Canadian Solar's stock price down too. But I am a long-term investor and will only see that as more of an opportunity to deploy more capital.

For further details see: