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Canadian Solar Stock: From Growth to Value
Stock Analysis & Ideas

Canadian Solar Stock: From Growth to Value

Although Canadian Solar (CSIQ) is already a leader in solar energy storage, it continues to increase its market share. Drivers for long-term revenue growth are industry prospects, massive demand for the company’s products, and the sale of energy storage projects.

Project sales are expected to grow at a CAGR of 25% through 2027. Canadian Solar retains stakes in some of them. Due to this, CSIQ will combine the qualities of growth companies and utility “cash cows.”

The subsidiary’s IPO will add cash to the balance sheet with which Canadian Solar can fund future capital expenditures. According to my valuation, CSIQ is trading at a discount to its fair price. I am bullish on the stock.

Company Profile

Canadian Solar Inc. is engaged in manufacturing and selling solar energy products and implementing large-scale solar projects. CSIQ operates in two segments: Global Energy focuses on developing utility-scale energy storage projects, CSI Solar manufactures and sells modules. The company is registered in Canada but focuses on manufacturing in China.

Canadian Solar sells its solutions to distributors, system integrators, project developers, and installers/EPC companies. The revenue structure is presented below:

Source: Created by the author, based on 10-K

Industry Opportunities

Photovoltaic power worldwide is expected to double in the next five years. More countries and regions are committing to decarbonization. Canadian Solar has excellent growth prospects as solar PV panels are critical to any global decarbonization scenario.

Canadian Solar’s strategy is to expand capacity and increase vertical integration. In 2021, the company’s market share grew by 2% year-over-year and now stands at 8%.

Canadian Solar has a global distribution and solid competitive positioning, the company is gaining market share, and its products are sold out several years in advance. The industry offers good growth potential for Canadian Solar, given the growing demand for utility-scale energy storage.

Financial Performance

The company’s revenue has increased from $2.85 billion in 2016 to $4.79 billion in the last 12 months. According to the results of Q3 2021, revenue grew by 34% year-over-year. Canadian Solar expects significant growth in 2022 due to:

  • growth of Module Shipments by 45%;
  • growth of Battery Storage Shipments by 70%;
  • growth of Project Sales 50%.
Source: Created by the author, based on the company’s data

CSIQ is going to increase project sales by 25% CAGR over the next five years, well above the global market growth rate. Next year, CSIQ plans to increase Project Sales by 50%, which will bring the company revenue of $720 million.

Canadian Solar’s margins have been behind the industry average for some time now. The gross margin and operating margins are 15.6% and 2.8%, respectively. Net Profit Margin is 1.58%. Management plans to raise prices to improve the situation actively.

Source: Created by the author

Asset-to-equity has increased and now stands at 3.7. The company has a relatively high debt load. Net debt is more than three times EBITDA (TTM). However, solvency is not threatened, as current EBITDA covers interest expenses by 6.2 times.

Source: Created by the author, based on the company’s data

Management has set ambitious goals for the coming years. Although margins are under pressure, in the long term, the expected growth across all business units and expansion of market share should drive revenue growth and profitability.

From Growth to Value

Although Canadian Solar is now a growing company, it retains ownership of projects such as Jaíba V. In the future, it might become a cash-flowing utility company.

Already, the Global Energy division is actively developing projects for solar energy and its accumulation in the utility market, which is six times larger than the market for private households.

CSIQ already has storage fee agreements signed with utility customers, universities, and others. While maintaining ownership and increasing the number of Project Sales, stable cash flows will be guaranteed in the future.

CSI Solar IPO at STAR Market

Canadian Solar announced on December 13 that its subsidiary CSI Solar received the approval of the list on the Shanghai Stock Exchange. Canadian Solar will remain the majority and controlling shareholder of CSI Solar.

CSI Solar plans to raise $628 million during the IPO. The funds raised will be used to increase production capacity, as Canadian Solar has very ambitious plans for 2022:

It will also give us the capital to immediately expand our manufacturing capacity with the most advanced manufacturing technologies.

This strategy will allow us to expand our market share, sustain and enhance our future pricing power and maintain better control over our manufacturing costs.

Dr. Shawn Qu, CEO

Valuation

I expect revenue growth in line with the Wall Street consensus. Margins and other relative indicators are predicted based on historical dynamics and the current trend. The terminal growth rate is 7.5%. My assumptions are presented below:

Source: Created by the author

Based on my assumptions, the expected dynamics of key financial indicators are presented below:

Source: Created by the author

With a stable growth cost of equity equal to 10%, the weighted average cost of capital (WACC) is 6.9%.

Source: Created by the author

With Terminal EV/EBITDA equal to 1.5x, the company’s fair value is $2.7 billion, or $42.56 per share.

In terms of EV/sales and EV/EBITDA multiples, the company does not look expensive compared to its main peers:

Source: Created by the author

Wall Street’s Take

From Wall Street analysts, Canadian Solar earns a Hold consensus rating based on one Buy and three Holds assigned in the past three months. At $45.5, the average Canadian Solar price target implies 62% upside potential.

Conclusion

Canadian Solar is of interest to long-term investors. Ambitious management forecasts, increased market share, and more will contribute to financial results.

Moreover, management expects growth in all business lines, and the globalization of solar energy will contribute to geographic expansion. According to the valuation, CSIQ is trading well below its fair price. Thus, I am bullish on the company.

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