Big gain for Canadian Solar

The shares of solar energy companies have been on the rise over the past few months as investors have taken a fresh look at an often volatile sector.

I first wrote about the sector in March and recently spoke to John Cook, CEO of Greenchip Financial Corp. to put the  moves in context and update Canadian Solar Inc., based in Quelph, Ontario. Greenchip is a green energy investing pioneer and holds Canadian Solar in its Greenchip Global Equity Fund.

Canadian Solar Inc. (NDQ: CSIQ) is one of the world’s largest manufacturers of solar panels. It was founded in 2001 and has operations in 24 countries. This includes two manufacturing plants in Ontario and others in China.

Canadian Solar has delivered over 38 gigawatts (GW) of solar capacity and has 10 GW of projects in its pipeline. It is moving away from a company that only manufactures solar panels to one with a second business, which is building turnkey solar power plants for utilities and large commercial power users.

Performance: The shares hit a low of US $12 on March 16 and have doubled since before dropping back to the current level of US $23.69 They are  up 30.12% in the last month and 7.51% year-to-date.

Financials: Canadian’s Solar’s first quarter results released May 28 beat we’re strong. Revenue rose 70% to $826 million. (All figures $US)  Net income was $110.6 million, or $1.84 per diluted share, compared to a net loss of $17.2 million, or $0.29 per diluted share in the first quarter of 2019. It held $1.04 billion in  cash and cash equivalents in the quarter.

Shipment of solar panels increased 41% year-over-year and  gross margin rose 480 basis points to 27%.

Discussion & Outlook:   The rising share price has as much to do with secular trends and industry developments, as it does with Canadian Solar’s strong performance, says Mr. Cook.

“Investors are realizing that solar companies add up to more than their current valuation,” he says.

One thread is a spate of dual stock market listings that has raised awareness and interest in the sector and its major players. A handful of solar companies already listed in New York are seeking to list in China as well.

This includes Canadian Solar which has been a member of the Nasdaq exchange since 2006. On July 27 it said it is seeking a listing on the science and innovations board either in Shanghai or  the Shenzhen Stock Exchange, a process that will take 12 to 18 months. Its shares jumped 8% the day of the announcement.

The rising share price has highlighted the fact that most of the value attributed to Canadian Solar comes from its main business which is the manufacture of solar panels. It largely ignores the potential of the growing business of building power plants. Canadian Solar closed the sale of a Japanese solar plant this winter. Since then it has signed commitments for two plants in Texas and two more in Brazil.

A related tailwind is that utilities are looking for more carbon-free sources of power leading to a rising demand for turnkey solar power plants.

Mr. Cook says a third trend is government initiatives that will increasingly favour solar. For example, U.S. presidential challenger Joe Biden has a $2T energy platform that includes  incentives for green energy.

Despite these positive themes, Canadian Solar’s trailing 12 month price to earnings ratio (PE) sits at 5.6.

Dividend: The company does not pay a dividend, but has a share repurchase program.

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(This is an edited version of an article that appeared in the Internet Wealth Builder newsletter on Aug. 10, 2020.)