3 Reasons To Ignore 'Overwhelming' Cynicism On Canadian Solar

Solar stocks are volatile investments, as they carry a high level of headline risk. Shares of Canadian Solar Inc. CSIQ tanked Thursday after the company released its fiscal third quarter results.

One analyst is upbeat about the company's prospects due to an anticipated business transformation.

The Analysis 

Roth Capital Partners' Philip Shen issued an upgrade note Friday.

The Rating

Shen upgraded shares of Canadian Solar from Neutral to Buy and lifted its price target from $15 to $24, citing the business transformation he projects will take place over the next six months. (See Shen's track record here.) 

The Thesis

An "overwhelming sense of cynicism" is priced into Canadian Solar stock, especially due to inordinate delays in its valuable Japanese and U.S. pipeline, Shen said in a note. Despite the overhang, the analyst said the stock was upgraded for three reasons: 

• The real asset value of the company is appealing, Shen said. The analyst estimates the stock to be worth $24 per share, with the Japanese portfolio alone valued at $9 per share and the U.S. asset base at $9 per share. The combined value of $18 per share when compared to the current stock price of $17 per share suggests that investors get the rest of Canadian Solar's project and module businesses absolutely free of cost, Shen said. 
• Roth Capital projects the balance sheet transformation will be complete in the near-term. About $1.9 billion of cash is expected, with $1 billion to be used for debt pay-down, while the remaining dollars could be used in part to invest in capacity expansion or simply be held as cash, according to RBC Capital. 
• The global module supply/demand dynamic is mostly in balance, primarily due to the "massive" 50-gigawatt-plus China market, Shen said. The analyst forecasts seasonal weakness in the fourth and first quarters and an air pocket in the U.S. in the first quarter. "Beyond that — assuming the Chinese market is flat year-over-year in 2018 — we expect module ASP declines to be modest in 2018, suggesting a healthier-than-perceived module business outlook," Shen added.

The Price Action

At the time of writing, shares of Canadian Solar were rallying 5.64 percent to $17.79. The stock slid 11 percent on Thursday following the quarterly results, although it's up 48 percent year-to-date.

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