CSIQ - Canadian Solar Soars Following A Strong Earnings And Margin Beat More Upside Ahead

2023-03-21 13:54:02 ET

Summary

• Strong bottom-line numbers and a decent growth outlook from CSIQ lifted the entire solar space on Tuesday.
• I see more upside due to the company's attractive valuation paired with robust earnings increases ahead.
• With a bullish reversal pattern taking shape, the charts are turning positive.

Solar stocks have been conspicuously quiet lately. Relative to the S&P 500, the Invesco Solar ETF ( TAN ) has been meandering with a slight downward bias in the last six months. On Tuesday, though, the often-volatile space was in rally mode.

Driving the alpha were strong Q4 numbers out of Canadian Solar (CSIQ), the ninth-largest holding in TAN. I see the stock as a buy today on valuation and improving technicals.

Solar Stocks Lackluster Lately

According to Fidelity Investments , Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar ingots, wafers, cells, modules, and other solar power and battery storage products in Asia, the Americas, Europe, and internationally. The company operates through two segments, Canadian Solar Inc. ((CSIQ)) Solar and Global Energy.

The Ontario-based $2.3 billion market cap Semiconductors industry company within the Information Technology sector trades at a modest 14.9 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to the Wall Street Journal.

CSIQ traded higher by more than 10% on Tuesday following better-than-expected quarterly results . The solar firm produced $1.11 of GAAP per-share profits, topping analysts' estimates of just $0.97. Sales grew a whopping 28.8% YoY with a 68% jump in solar module shipments to 6.4 GW – above the previously given guidance range of 6.0 to 6.3 GW. Perhaps most important in my view were gross margins that verified on the high-end of guidance at 17.7% (versus a 16% to 18% range). The company reiterated its FY2023 guidance figures.

CSIQ is forecast to have tremendous earnings growth in the quarters ahead, according to CFRA consensus estimates. EPS is seen as rising 69% this year followed by a 33% increase in 2024. Top-line growth is also robust. If we apply CSIQ’s 5-year average forward operating earnings multiple of 18.59 to $3.21 of expected EPS, then shares should be near $60, a roughly 50% premium to the current stock price. Also, its forward PEG ratio is exceptionally low at 0.27. Thus, it’s not surprising that Canadian Solar earns an A valuation rating from Seeking Alpha’s factor grades along with an A+ on growth .

Canadian Solar: Revenue and Earnings Growth Forecasts

Looking ahead, corporate event data from Wall Street Horizon shows a quiet calendar until the Q1 earnings release slated for May 25.

Corporate Event Risk Calendar

The Technical Take

With shares on the cheap, I see bullish potential on the chart. Notice in the graph below that shares are putting in a bearish to bullish reversal pattern, also known as a rounded bottom. There’s key resistance in the $47 to $49 range. Following my previous article on the firm, CSIQ failed to climb above its June 2021 spike high during its August rally, fueled by the Inflation Reduction Act and an earnings report. Today, I see support in the low $30 and I like how the long-term 200-day moving average has turned positive in its slope – buttressing the case for a bullish reversal. Long here with a stop under $33, just below the March low, targeting the high $40s is a decent risk/reward play.

CSIQ: Bullish Rounded Bottom, $48 Resistance

The Bottom Line

CSIQ is undervalued here with a strong growth outlook and a low earnings multiple. The technicals are also in favor of the bulls. Tuesday’s strong Q4 report has lifted the stock greatly, but I assert a GARP case is still sound.

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