Earnings Preview: Canadian Solar Inc.

Canadian Solar Inc. (CSIQ), a low cost, vertically-integrated solar module producer with predominantly China-based manufacturing assets, is scheduled to report its fourth-quarter 2011 financial results on Thursday, March 10, 2011. The current Zacks Consensus Estimate for the quarter is 65 cents a share.

Third Quarter 2010, a Synopsis

Canadian Solar boosted by higher demand for photovoltaic solar modules reported strong results for the third quarter of fiscal 2010. For the quarter, adjusted earnings came in at 47 cents per share, which beat the Zacks Consensus Estimate of 43 cents. The company’s results however came short of the year-ago quarterly earnings of 69 cents.

Canadian Solar had revenues of $377.2 million, beating the Zacks Consensus Estimate of $346 million. In the quarter the company witnessed higher shipment volumes and gross margins. Gross margin was 17.3% in the reported quarter compared to 13.6% in the second quarter of 2010. Increased vertical integration and improved non-silicon processing costs provided most of the gross margin improvement.

Canadian Solar’s upside in quarterly sales came from its global markets with Europe continuing to be its largest contributor. Revenues from the European market in the reported quarter accounted for 77% of total sales, down from 87.6% in the year-ago quarter. However in real terms, revenues from the European market increased to $290.3 million from $186.6 million in the year-ago quarter. Canadian Solar also significantly increased its sales to the Asia Pacific region and America as part of its market diversification strategy.

Fourth Quarter 2010 Consensus

Analysts surveyed by Zacks expect Canadian Solar to post fourth-quarter 2010 earnings of 65 cents a share. The current Zacks Consensus Estimate represents a year-over-year growth of 86%. Analyst estimates for the quarter range from a low of 47 cents to a high of 78 cents over the past 30 days.

The current Zacks Consensus Estimate has increased by a penny over the last 30 days; as only 1 of the 11 analysts covering the stock revised his estimates upward. On the other hand, in the last 30 days, no analysts have lowered their forecast, with the consensus trending towards the status quo.

Earnings Surprise History

With respect to earnings surprises, Canadian Solar has reported below the Zacks Consensus Estimate over the last four quarters with an average of negative 25.13%. This suggests that Canadian Solar has underperformed average analyst expectations during this period.

Canadian Solar in Neutral Lane

Canadian Solar is a vertically-integrated manufacturer of silicon ingots, wafers, cells, solar modules and custom-designed solar power applications. The company sells its products to customers worldwide, spread across Germany, Spain, the U.S., France, the Czech Republic, Italy, South Korea, Canada and China.

Canadian Solar offers one of the broadest crystalline silicon solar module product lines in the industry, ranging from modules made of medium power, low-cost upgraded metallurgical-grade silicon, to high efficiency, high power output mono-crystalline modules, along with a range of specialty products.

Canadian Solar’s standard solar modules are sold to distributors and system integrators, and specialty solar modules and products to various manufacturers, who integrate these solar modules into their own products or sell and market them as part of their own product portfolio.

Canadian Solar’s China-based manufacturing assets have a distinct cost advantage over its peers. The company also pursues a balanced and diversified supply channel mix by entering into long-term supply contracts and toll manufacturing arrangements. In addition to in-house solar cell, wafer and ingot manufacturing, it is also ramping up its internal solar cell capacity to cut back its reliance on third party solar cells for the manufacture of solar modules.

Looking forward the prospects for Canadian Solar are favorable based on a geographically-diversified customer base, ongoing capacity expansion programs, improving operating efficiencies, rising margins and material cost savings through its vertically integrated manufacturing operations.

However, in the near-term its shipments were curtailed by higher solar cell prices in the market, which were eating into its margins. The company is addressing this by ramping up its captive solar cell capacity. However, it will take some time before the company becomes self-sufficient for its solar cells requirements.

Canadian Solar currently is trading at a premium compared to its peers in terms of forward earnings estimates. Thus in the near term, we believe the Zacks #1 Rank (Strong Buy) peers like JinkoSolar Holding Company (JKS), and LDK Solar Company Ltd. (LDK) offer more promise compared to the Zacks #4 Rank (Sell) Canadian Solar stock.

CANADIAN SOLAR (CSIQ): Free Stock Analysis Report

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