Canadian Solar Stock: Weed Could Power Up This Solar Play

canadian solar stock
iStock.com/OlegMalyshev

Canadian Solar Inc. Could Be the Answer to Marijuana Growers’ Electricity Needs 

The use of medical marijuana is currently legal in 30 U.S. states, with nine of those states also allowing the recreational use of marijuana. And on October 17 (or thereabouts), Canada will open its entire nation to recreational weed. I fully expect a bump in marijuana tourism to Canada.

But while the media and investors focus on marijuana stocks, one thing you need to keep in mind is the large-scale growers of weed. Specifically, those with greenhouse operations will require a significantly large and cost-effective power source.

While there is little discussion about this power topic right now, I’m pretty sure it will become more critical as more facilities come online.

An interesting thought is the employment of solar energy to complement the electric grid in growing marijuana. To play this potential connection, a solar solutions company like Canadian Solar Inc. (NASDAQ:CSIQ) seems logical.

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We all know about the initial surge and subsequent dovetail in the solar energy sector, but many of these companies have cleaned up their balance sheets.

The idea of using solar panels to provide another source of power to marijuana producers is intriguing in my view.

The reality is that Canadian Solar can easily build the required power capacity. The company is working on several big commercial power projects, so the thought of powering a million-square-foot grow-up doesn’t seem that unreasonable.

Canadian Solar could be ripe for the challenge and provide another revenue source for its solar solutions. The company has operations in 20 countries and customers in over 90 countries.

CSIQ stock is down 13% this year and down more than 20% from its 52-week high, so now may be an opportune time.

On the chart, Canadian Solar stock is facing key resistance around $19.00. A breakthrough could see the stock take a run at $28.00 or $35.00—an potential upside of 138%.

Chart courtesy of StockCharts.com

My Fundamental Bull Case for CSIQ Stock

Canadian Solar has grown its revenue in three of the past four years, doubling its it from $1.7 billion in 2013 to $3.4 billion in 2017.

Fiscal Year Revenue (Billions) Growth
2013 $1.7
2014 $3.0 79.0%
2015 $3.5 17.1%
2016 $2.9 -17.7%
2017 $3.4 18.8%

Looking ahead, CSIQ is expected to record revenue growth of 15.8% to $3.9 billion in 2018, followed by 1.4% growth to $4.0 billion—or as high as $4.7 billion—in 2019. (Source: “Canadian Solar Inc. (CSIQ),” Yahoo! Finance, last accessed August 30, 2018.)

Canadian Solar also produces positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and regular earnings, with growth in 2014 and 2017. EBITDA surged 119.2% in 2017.

Fiscal Year EBITDA (Millions) Growth
2013 $211.6
2014 $448.9 112.1%
2015 $343.2 -23.6%
2016 $146.5 -57.3%
2017 $321.1 119.2%

The company has been consistently profitable.

Fiscal Year Diluted Earnings Per Share Growth
2013 $0.63
2014 $4.11 552.4%
2015 $2.93 -28.7%
2016 $1.12 -61.8%
2017 $1.69 50.9%

One concern is the declining earnings-per-share (EPS) revisions for 2018 and 2019, which hopefully Canadian Solar can correct.

For 2018, Canadian Solar is estimated to report $1.47 per diluted share, versus $1.69 per diluted share in 2017. The high estimate for 2018, however, is $1.87 per diluted share.

In 2019, the earnings outlook looks brighter, with Canadian Solar expected to earn between $1.71 and $2.18 per diluted share.

The company’s balance sheet has $2.4 billion of debt and $452.5 million in cash. The debt ratio is higher than what I would like to see, but I’m not concerned, given the company’s profitability and positive EBITDA.

The key free cash flow (FCF) was positive in 2013 and 2014 prior to turning negative from 2015 to 2016. I expect the company’s FCF to improve as its earnings rise.

Fiscal Year Free Cash Flow (Millions)
2013 $88.7
2014 $169.4
2015 -$345.6
2016 -$1,250
2017 -$346.21

Analyst Take

While Canadian Solar Inc. doesn’t currently have any major connection to the marijuana sector, it’s likely that the company will sell solar solutions to the segment.

Even if nothing major materializes, Canadian Solar stock still looks attractive, trading at a mere 8.6-times its estimated 2019 EPS and 6.7-times its high estimate. The company’s price/earnings-to-growth (PEG) ratio of 0.47 is dirt-cheap, offering potential investors some room for mistakes.