Sky's the Limit for Canadian Solar

 | Oct 10, 2013 | 3:32 PM EDT  | Comments
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Stock quotes in this article:

csiq

When a stock is almost up 500% year to date, how can any potential upside remain?

Canadian Solar (CSIQ) is one of the dozens of solar stocks that saw a huge run-up in 2008. They were part of the commodity super-cycle that played out at the time. Resources were scarce. China and India were going to exhaust the world's energy supplies. Therefore, everyone would have to use solar power in the future.

Then the financial crisis hit, and suddenly all commodities dropped. Solar names suffered incredible retracements from all-time highs.

Canadian Solar was no different. After hitting nearly $46 in 2008, the stock was at $2 last November, meaning market capitalization of around $200 million.

At that price, investors were pricing a serious chance of bankruptcy risk into the stock. Most of Canadian Solar's business then comprised selling solar panels to consumers – especially in China. The problem with this business -- besides the dependency on the government sector in order to make the solar option feasible -- is that there's not much visibility into your future sales pipeline. You're only as good as your last sale.

Back then, Canadian Solar had a price-to-book value of far below 1.

But things have changed this year. It's not just the general comeback of the solar industry this year, though that certainly has helped. Starting in 2011, the price of polysilicone started to drop precipitously in the industry, and there was generally overcapacity for the economic conditions around the world.

This year has been one of stabilization for the industry, and we've seen a bottoming of polysilicone prices. One of the aftermaths of the Fukushima disaster in Japan has been a surge of interest in Japan regarding solar projects. The whole industry is seeing a slow and steady increase in demand from around the world.

So Canadian Solar has ridden this wave along with every other solar stock. What's different about Canadian Solar, though, is that it has grown a strong second business in the past year called the "total solutions" business. It basically involves building a solar plant to sell to an owner, who then operates it and makes money from it.

This total-solutions business has a 30% margin vs. 15% for the company's older consumer business line. It also brings better revenue visibility. The projects take several months to complete, and revenue is recognized as the plants are built out. So, as Canadian Solar has built out its pipeline, it has had much longer visibility into its future revenue guidance -- at a better margin, to boot.

Canadian Solar generated more than $1 billion in revenue in the last year, but it was barely positive on earnings before interest, taxes, depreciation and amortization.

Total solutions presently constitutes about 20% of their business. If all goes well, it will be at more than 50% by the end of the year and keep growing, according to management. Canadian Solar should therefore more than double its revenue next year, and also become cash flow positive for the first time. Its net debt-to-equity ratio will dramatically change for the better.

The company has had two great quarters in a row, and its next is due out in a few weeks from now. This is not a widely covered stock on the Street, given its recent small size, but that's probably going to change quickly.

Nomura has a price target of $25 on the stock -- which the firm put on when the shares were trading around $10 in June.

It's having a great day today, along with the other high-beta names. If the business-mix story keeps playing out, this stock can still go considerably higher from current levels.

Columnist Conversations

Just some resistance to be aware of. Not saying it will cap the market, just that it is there for a decision....
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Kass:
On the weaker than expected #s. From $143 to $106.

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