Summary
The company exceeds its own guidance on top and bottom lines.
YieldCo is key to the company's future success.
The stock is undervalued, but not based on multiples comparison.
What may worry investors
Despite the great first-quarter earnings, Canadian Solar offered a soft second quarter outlook, forecasting revenues between $570-620 million and a disappointing 13-15% gross margins. During the conference call, the company actually forecast stabilizing module ASPs in the second half of the year due to stronger demand. Moreover, the company has been consistently lowering its manufacturing cost.
According to the investor presentation, the manufacturing cost has decreased significantly from $1.32/W in 2011 to $0.49/W at the end of Q4 2014. The declining costs and stabilizing ASPs will all together help stabilizing the gross margins towards the end of 2015. The declining margins and profitability in the short term is mainly due to the fact that the company now focuses on retaining the solar projects rather than selling them upfront. From the scheduled list, we can see that the company only has one 14MW utility-scale project to sell in Ontario in the second quarter of 2015. By retaining the solar projects on the balance sheet, Canadian Solar will be better positioned to launching the long-awaited YieldCo, which has been favored by many investors....
The company has made it clear that it is going to evaluate all solar projects in its pipeline and drop them into the YieldCo in late 2015 or early 2016. Let us review the company's current late-stage project pipeline that is expected to be included in the YieldCo:
UK - 40.2MWp connected to grid. 52.5MWp to be completed by 2015
USA - 1,021MW, with expected COD in 2016
China - 340MW DC of projects, with 320MW DC expected to be connected in 2015
Japan - 720MW DC; 262MW DC of projects have full grid connection approval. 45MWp of projects are expected to be completed in 2015
Brazil - 114MW DC to be connected in 2016, and electricity generated will be purchased by the government under a 20-year PPA
Source: Investor Presentation, Apr 2015
The story does not end here as the above list only shows the company's late-stage pipeline. The company currently has a total project pipeline of 8.5GW given the Recurrent Energy acquisition. Given the quality pipeline and the upcoming YieldCo, Canadian Solar will have greater earnings visibility well beyond 2016.Investors will pay a premium for the earnings visibility and stability in the solar business, as the solar industry traditionally has been viewed as a volatile business with no earnings stability. For example, SunEdison (NYSE:SUNE) is currently trading at over $7 billion in market cap while the business has not had a positive earnings since 2012.
.......
Canadian Solar indeed looks quite undervalued based on all three measures. However, I personally disagree when investors claim the stock is undervalued based on these multiples alone. First of all, Canadian Solar, like it or not, is still perceived as a commodity solar module producer (the module ASPs will never return to the level we saw back in 2010) while solar companies like SunPower and First Solar are perceived to be operating in the higher-margin solar project and solutions business. The Street is not going to give a premium for the commodity module producer due to the declining average selling prices for solar modules.
You may argue that ASPs can stabilize starting in the second half of the year given a stronger demand. However, the general trend and consensus in the solar industry favors a sustained decline in solar PV prices in the next decade. As a result, the solar module producers will never be able to return to the same level of profitability they enjoyed in 2010......
I believe Canadian Solar is undervalued based on its existing project pipeline, the future YieldCo business plan, and its proven and successful business model transition and execution under the right leadership.
In summary, the company may indeed have a soft second quarter, but this should not matter if you believe in the success of its upcoming YieldCo and more importantly, the company's ability and ambition to be one of the best solar energy providers in the world.
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