Canadian Solar: Is the renewables growth story priced like a value stock? (NASDAQ: CSIQ)

introduce:

Canadian Solar (NASDAQ: CSIQ) saw its stock price plummet after releasing its latest earnings report in late August. The stock fell nearly 17% in the following days amid weak guidance for the rest of the year.The current inventory is The stock has fallen more than 40% since early June, and the stock is currently trading at a price similar to 2019. We think this presents an interesting opportunity to open a position in CSIQ, as the stock’s earnings report isn’t bad at all.

In this article, we take a look at CSIQ’s future prospects and its current valuation. Not only do we compare them to their competitors, but we also compare their valuations to the big tech companies.Additionally, we explore whether investors like you should consider CSIQ as an alternative investment Renewable energy space.

Canadian Solar: Exponential growth and renewable energy tailwinds

Founded in 2001, Canadian Solar is a leading designer and manufacturer of silicon ingots, wafers, cells, solar modules (solar panels) and custom solar applications. According to the Canadian Solar website, Canadian Solar has active purchasing customers in more than 160 countries around the world and has subsidiaries in 23 countries and regions on six continents.

Notably, Canadian Solar holds a 72% majority stake in CSI Solar Ltd (62% after the most recent IPO), which held its initial public offering on the Shanghai Stock Exchange in June 2023. CSI Solar covers solar module and battery storage manufacturing, as well as providing comprehensive system solutions including inverters, solar system kits and EPC services.

As we’ve discussed before in Copper, renewable energy is one of the industries expected to grow significantly over the next decade. Additionally, we discuss the entire renewable energy industry in part two of our high-growth series. The potential market for solar energy is huge, and according to Grand View Research, it is expected to maintain an astonishing compound annual growth rate of 15.7%. This gives Canadian Solar a huge advantage in the foreseeable future.

The chart below shows that CSIQ has experienced explosive growth over the past decade, and especially over the past 3 years. We believe CSIQ is well-positioned to continue on this trajectory.

While the stock didn’t consistently deliver revenue and gross profit growth in the years leading up to 2020, the company has been able to grow rapidly over the past few years, as the chart below shows.

The stock is currently trading at the same level as in 2019, while gross profit has doubled since then. Nonetheless, revenue and gross profit have been growing well.

Nonetheless, we must acknowledge that growth is definitely slowing and that the transition to renewable energy will be more difficult than expected. The infrastructure required for renewable energy requires significant investments, which may be further delayed, especially in difficult economic times. This explains the recent guidance cuts and weaker-than-expected results from nearly every company in the solar space.

Renewable energy and its current situation

Nonetheless, it is expected that the price of solar system components will continue to decrease further due to continued improvements in technology. In the future, it is expected that solar systems will be cheaper than the coal or natural gas power plants currently operating, but this is not currently the case. Furthermore, we believe nuclear energy will remain a key component of the overall energy supply in the coming years.

The chart below from the U.S. Energy Information Administration (IEA) shows that overall clean energy prices and the price of solar panels have declined over time. As mentioned above, a large part of the price decline is due to investment in technology. Still, overall prices for clean energy equipment and solar panel equipment have increased over the past two years due to high inflation. However, this suggests that when inflation declines, the price of equipment is likely to fall again as well.

Additionally, CSIQ will benefit significantly from tax credits issued under the U.S. Inflation Reduction Act (IRA) passed last year. Since manufacturers receive significant tax credits for their investments in renewable energy, this should have a direct impact on demand for solar and, therefore, Canadian Solar.

The United States is not the only region that offers favorable tax incentives for renewable energy investments. Europe aims to increase renewable energy to 45% of total European energy production by 2030, an initiative launched by the Net Zero Industry Act.

CSIQ: Never been more attractive since IPO

First, we must acknowledge the current headwinds. Weaker guidance and, more specifically, slower growth are concerning.

The main factor causing this slowdown is the high interest rate environment. Even taking into account subsidies and tax breaks, investing in renewable energy, especially solar, is still quite expensive. Investments of this magnitude are typically financed through debt, making renewable energy solutions increasingly unviable in a high interest rate environment.

Now let’s look at valuation. With weaker guidance and a bleak overall market outlook, investors are no longer willing to pay a hefty premium for growth. That’s the case with ENPH, but CSIQ’s valuation is already so low that the cuts make it a very attractive buying opportunity.

As the chart below shows, Canadian Solar is currently trading at historically low valuations, even below the stock market lows during the COVID-19 pandemic in March 2020, when the stock traded below $15 per share.

Additionally, earnings per share have never been higher, as the chart below shows.

Before looking at its peers, it’s interesting to note that Seeking Alpha’s Quantitative Ratings rates CSIQ A+ across all valuation metrics, as shown in the table below.

Now let’s look at their peers. As the chart below shows, CSIQ is one of the cheapest compared to its peers, trailing only JinkoSolar (JKS). Still, we have to consider profitability.

While JKS looks cheap and has an interesting valuation, the company’s cash flow isn’t promising. For example, in fiscal 2022, JinkoSolar had negative cash flow of $2.6174 billion, while CSIQ had positive cash flow of $288.6 million during the same period.

Additionally, the only cash flow positive companies on this list are CSIQ, ENPH, and SEDG. All other investments are cash flow negative and therefore not currently profitable. Still, these other businesses are very interesting, especially the aforementioned JKS.

Currently, the company’s 5-year revenue CAGR is 20.02%. Furthermore, based on 2022 data, their FCF yield is approximately 17.18%, which shows that the company is able to buy back itself in less than 6 years, which is very impressive. Furthermore, CSIQ’s ROIC is 20.46%, which indicates that for every $100 spent, the company is able to generate an additional $20.46 in operating income.

Will CSI Solar IPO unlock value for shareholders?

In June, CSIQ announced that its majority-owned subsidiary (72%) CSI Solar Co had completed the IPO process. The IPO generated about $6 billion in yuan, which was about $850 million at the time. higher than many analysts expected. This was calculated based on the price of 11.10 yuan at that time. Currently, CSI Solar Co Ltd (SHA: 688472) is trading at $14.16.

Overall, Chinese investors prefer manufacturing companies and are willing to pay higher price-to-earnings ratios than U.S. and European investors. This dynamic may have played a role in the decision to list in China.

For these reasons, we believe CSIQ shares could rise significantly based on closing the value gap between U.S. and Chinese public companies. After the IPO, assuming all over-allotment options are exercised, CSIQ holds approximately 62% of CSI Solar’s ​​shares. At the time of writing, this 62% stake is worth approximately $4.38B. That’s more than 2x CSIQ’s current market cap, and while valuations will never reach par, even at a 25% discount, CSIQ’s shares are worth $3.285B, which means the stock price is about $50.91 or almost 2x the current share price.

technical analysis

As you can see in the chart below, CSIQ has had a rough couple of weeks, breaking out of green trendline support even before announcing a guidance cut. The stock fell to the $25.53 level for the week, where it has hovered since. It will be important to see if the stock can hold here, otherwise, we may see more downside in the near term, with a correction towards the $22 level being the first area of ​​support we need to watch.

The stock is also currently trading below all of its moving averages on a daily basis, indicating that bears are currently in control.

If we rebound here, the first resistance will be the green trendline, which has now become resistance. A break above this line could quickly send us towards the $35 area.

in conclusion

In summary, despite near-term headwinds and weaker-than-expected guidance, Canadian Solar currently offers an interesting buying opportunity. The company operates in the fast-growing renewable energy sector and expects solar to expand significantly in the coming years.

Although the days of exponential growth may be over. I believe CSIQ will continue to grow and margins will increase once the macro outlook improves. In addition, technological advancement will continue to reduce equipment costs.

CSIQ is currently trading at historically low prices, providing an attractive entry point for potential investors. A small investment in this company operating in an exciting industry could yield substantial returns in the future.

Considering that closing the value gap alone offers significant upside, regardless of other factors, makes us bullish on the company, so we rate CSIQ a Buy.