Canadian Solar Inc.: Why This Cheap Solar Play Can Double

CSIQ stockThis Solar Energy Play on Sale at Big Discount

The euphoria behind the solar energy trade reached its pinnacle on January 25 when the Invesco Solar ETF (NYSEARCA:TAN) traded at a record high, driven by President Joe Biden’s push for a Green New Deal.

But since that high, stocks in the green energy sector—solar, wind, water, electric vehicles, etc.—have pulled back by more than 30%. With the lower share prices, I’m seeing opportunities.

Take the case of mid-cap Canadian Solar Inc. (NASDAQ:CSIQ), which traded at a record $67.39 on January 25 but has since sunk to the $40.00 level. Canadian Solar stock is now trading at the level it was at prior to the “Biden bump” last November.

CSIQ stock is still up 198% over the past year, but it’s down by 15% in 2021.

Advertisement

The below chart shows Canadian Solar stock trading down to the level of last November’s sideways channel, which followed a breakout from $25.00 in August 2020.

The positive news is that CSIQ stock is managing to hold its trendline. There was a recent test of its trendline support, which held and bounced.

Canadian Solar stock is currently hovering at the top of its previous ascending triangle resistance and is looking for direction. The downside risk is the channel support around $36.00.

Chart courtesy of StockCharts.com

In my view, the selling from the high provides investors an opportunity to add CSIQ stock if they missed the initial bump.

The fact that Canadian Solar Inc.’s market cap of $2.6 billion is below its 2019 revenues of $3.2 billion makes for an attractive investing situation.

Why CSIQ Stock Is Worth a Much Higher Valuation

While the COVID-19 pandemic negatively impacted businesses in 2020, Canadian Solar Inc. still managed to deliver small revenue growth of 9.4% in the year.

Fiscal Year Revenues (Billions) Growth
2016 $2.9 N/A
2017 $3.4 18.8%
2018 $3.7 10.4%
2019 $3.2 -14.5%
2020 $3.5 9.4%

(Source: “Canadian Solar Inc.” MarketWatch, last accessed March 22, 2021.)

The revenue outlook looks somewhat optimistic for the company. Analysts estimate that Canadian Solar’s revenues will rise by 53.6% to $5.3 billion in 2021 and by 9.2% to $5.8 billion in 2022. The uncertainties due to the pandemic are reflected in the wide range of the estimates, ranging from $4.8 to $6.6 billion in 2022.

But even at the lower revenue estimate, Canadian Solar stock would trade at only 0.57 times the company’s 2022 revenues.

Canadian Solar Inc. has also consistently delivered positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

At the bottom line, the company has been profitable, reporting positive generally accepted accounting principles (GAAP) earnings per share (EPS) in five consecutive years.

Fiscal Year Diluted EPS Growth
2016 $1.12 N/A
2017 $1.69 50.9%
2018 $3.88 129.6%
2019 $2.84 -26.8%
2020 $2.38 -16.2%

(Source: Ibid.)

There may be concern, however, as profits fell in 2020 and are expected to further contract to $2.10 per diluted share in 2021. The estimates range from a loss of $0.51 to earnings of $5.71 per diluted share. (Source: “Canadian Solar Inc. (CSIQ),” Yahoo! Finance, last accessed March 22, 2021.)

The company is expected to ramp up its profits to $3.05 per diluted share in 2022, but the estimates continue to be wide-ranging, from $0.53 to $5.61 per diluted share.

After failing to deliver positive free cash flow from 2015 to 2017, Canadian Solar Inc. came back with three years straight of positive free cash flow.

Analyst Take

I view the recent selling of CSIQ stock as an opportunity for investors to initiate a first position or add to an existing position.

The fact that Canadian Solar stock trades at a major discount to its revenues is attractive and could offer some downside cushioning.

The global push toward a lower-carbon environment will continue to provide strong tailwinds for growth. Canadian Solar Inc. is primed to take advantage of the demand for solar solutions.