Why I’m bullish on both Canadian Solar (CSIQ) and the solar industry at large.
Canadian Solar is a solar power company that develops and manufactures solar cells and other solar products. It also develops solar power projects for electricity generation. Its solar products are used in residential, commercial, and industrial solar power systems. Though the market has been down quite a bit recently, few companies have taken bigger hits than Canadian Solar. It’s down 42% in the past three months alone.
Personally, I’m viewing the dip as a buying opportunity. Here’s why:
- Massive Industry Growth and Potential
The global solar market is expanding so fast that the annual solar installed capacity more than doubled in the five year period between 2010 and 2014. Despite the rapid growth, only the surface is beginning to be scratched. Solar currently accounts for only a tiny fraction of the global electricity production at just 4%.
China has made a big commitment to solar energy and provides incentives for those who fuel with solar power. And as the most populous country in the world, that means a huge market potential.
- Industry Leadership
Canadian Solar is one of the top three biggest solar panel makers in the world. It’s a leader in the market in terms of production capacity, performance and cost structure. On top of that, CSIQ is projecting to lower the cost of its modules significantly, which will make it even more competitive than it is today.
Canadian Solar is also planning to expand its downstream operations, which will allow it to develop more solar energy projects (actually harnessing the power instead of just manufacturing the parts for the system).
- Low Price to Earnings Ratio
On a pure fundamentals basis, CSIQ indicates a buying opportunity. As of today, its price to earnings ratio (PE) is only 3.7. That’s important because a PE ratio is one measure of how much a company is overvalued. The higher the PE ratio, the more overvalued it is. In theory you’re paying for a lot of potential future earnings, not actual historic earnings. You might be fine paying for a high PE ratio if you’re expecting lots of growth out of accompany, but in general the lower the PE ratio is, the better.
So when it comes to PE ratios, CSIQ is pretty much winning the limbo contest. According to the Wall Street Journal, the P/E ratio for the S&P 500 was 20.59 as of Friday, Sept. 29. And Apple’s (AAPL) P/E, a generally low one among big companies, is 12.75. So a P/E of 3.7 is quite low. Imagine CSIQ just won the limbo contest. And for a crazy comparison, Netflix’s (NFLX) PE ratio is 229 today. That indicates to me that CSIQ is being undervalued right now.
- Healthy Balance Sheet
Canadian Solar has a sufficiently healthy balance sheet. It has $1 billion in its cash balance, and produced $154 million of net cash from operations in the first half of 2015. However, Canadian Solar’s cash position is offset by $1.5 billion in debt and convertible notes. Nevertheless, the balance sheet remains fairly healthy.
CSIQ also has been showing declining costs of revenue, which indicates it could be even more profitable in the future.
Though counting the positives is good, it’s also important to consider the risks of an investment. Here are a few risks that give me pause on CSIQ:
CSIQ is not technically a Chinese corporation, but most of its manufacturing takes place in China. Between that and the fact that most of the large solar companies are Chinese, its subject to much of the swings we’ve seen in the market due to the news out of China. Its manufacturing in China also means the company faces the additional costs of import tariffs from the U.S. and even Canada, as well as import regulations in the European Union.
- Declining Oil Prices
As odd as it sounds, solar and oil companies tend to move in tandem in the stock market. If oil is cheap, there’s less of a demand for alternative energies such as solar. So if oil prices continue to decline, CSIQ’s price could decline as well.
The solar market has quite a few large players. Though it’s good that CSIQ is among them, the declining cost of solar and competition among solar companies to decrease prices could lead to lower profits over time.
- Long Time Frame
Solar power still isn’t the mainstream source of energy. That’s good, since there’s a lot of room for future growth, but it also means it could take a while to take off. While I strongly believe that solar will continue to be a growing source of energy, I also realize that it could take a while to catch on. That means you may not want to buy shares in solar companies unless you’re prepared to wait a while for the prices to rise. It could be sooner, but I’m prepared to wait a year before I see any significant profits on my CSIQ investment. That said, you should be investing for the long term anyways.
Weigh the positives and the risks and see what you think. For me, they add up to a buy decision.