Monday, February 10, 2014

Investing in Solar Power Earnings Growth

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Although the solar power industry took a bit of a breather in the fourth quarter of 2013, it now appears that the sector is back on track. Strength has been seen in many names to start the year, and there is plenty of reason to believe that more gains can be had in this corner of the market in 2014 as well.

While there are a number of solid names in this segment, one that you have probably overlooked until now is Canadian Solar (CSIQ - Trend Report). While the name ‘Canadian Solar’ might sound like a bit of an oxymoron, investors should definitely be paying attention to this solar company which could be the cream of the crop for investors this year.

CSIQ in Focus

Canadian Solar is a leading vertically-integrated solar module producer that has operations around the globe, but focuses in on North America, Europe, and Asia. Much of the company’s manufacturing capacity is located in China, though it does have a plant in the Ontario province of Canada as well.

The firm has a definite tilt towards European operations, as this segment accounts for about 50% of total revenues. While this was a bit of an issue in years past, European is turning around and CSIQ is looking to clean up in this market once again.

Beyond Europe, the company is also making a name for itself in Asian markets, and particularly in the fast-growing Japanese solar space. This is a very important market—given Japan’s desire to replace nuclear power—and since Canadian Solar is now the top foreign solar company in Japan, the firm looks to have a bright future in this key country.

We have already seen strength in many of these markets, as the company’s latest earnings report—although it missed our consensus estimate by one cent-- saw net revenues that were up nearly 29% (qoq), while gross margins hit 20.4%, a huge increase from the previous quarter which was at just 12.8%, suggesting a huge uptick in some of the firm’s key metrics.

So, thanks to this strong position in Japan, a more robust European market, and strong margins and revenue numbers, things are looking quite good for CSIQ. In fact, the company has seen strong estimate revision activity as of late, and it is looking for amazing growth rates well into the future as well.

CSIQ Estimates in Focus

With a recent analyst revision, CSIQ is expected to see year-over-year earnings growth of over 166% for this quarter. And for the full year, growth of over 125% is expected for the company, and over 300% growth for the following year as well.

Clearly, Canadian Solar has come a long way in a very short time period, as the company was actually posting a huge loss last year, but is now projected to see profits approaching $0.84/share for the year. And best of all, even with this great rate of growth and impressive turnaround, CSIQ is still trading at a forward PE below 12, suggesting it is an incredible value.

Bottom Line

Given these factors, it shouldn’t be too surprising to note that Canadian Solar has earned itself a top Zacks Rank #1 (Strong Buy), meaning we are looking for outperformance from this name this quarter as well. And with a fantastic industry rank for solar power, currently the industry is in the top ten industries out of more than 250, it is pretty clear that solar power is poised for more gains in 2014 too.

So, with this broad based strength in solar and hopes for more solar demand in 2014, it is undeniable that solar power companies should be on your radar this year. And given the rebound and strong growth in some of CSIQ’s key markets, along with its increase in solar module shipments and surging gross margin, it should be easy to see why CSIQ is a top pick in this surging segment of the market.

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