Top Solar Analyst Explains Canadian Solar Downgrade

Axiom analyst Gordon Johnson downgraded Canadian Solar Inc. CSIQ to Hold Friday after the firm’s CEO reported a take-private offer of $18.47 per share.

The rate not only suggests 29-percent downside to Johnson’s fair value estimation of $26, but also implies inflation in Axiom’s modeling assumptions.

"Anecdotally, the way we take it is CEO is telling us that we're being a bit aggressive in our valuation approach,” Johnson said on Benzinga's PreMarket Prep show.

However, Johnson adjusted his thesis with reluctance.

"The downgrade on CSIQ is a tough one because we really like the long-term story,” he said, praising the firm’s management team.

Risks Cloud Near-Term Performance

The ratings update partly reflects fresh near-term risks to earnings.

Canadian Solar’s fourth quarter estimates assume the sale of projects expected to have been sold in the third quarter to Korea Electric Power Corporation (ADR) KEP and China’s Shenzhen Sungold Solar Co. Ltd. — revenue that could be delayed by trouble from the Committee on Foreign Investment in the United States.

“Given that Congress is about to go on break, we think there's a lower probability that CFIUS approves these projects before year-end,” Johnson said. "If this does not happen, we believe there's going to be a significant cut to Canadian Solar's Q4 revenue and EPS.”

While the projects could come through in 2018, according to Johnson, a KEP-less Q4 could realize revenue of just $1 billion against $1.7 billion estimates, with earnings per share down to 57 cents against $1.04 estimates. Those cuts, in turn, could pressure the stock and compound investor concerns about the sales timeline.

Here’s To A Brighter 2018

Meanwhile, the potential for a buyout does lend Canadian Solar a “floor,” Johnson said, but the firm may sell for less than it’s $18.47 offer.

“If this deal were to fall apart and the board didn’t approve, I think the floor on the stock would come out, as well as the potential ceiling, but we just see a number of near-term risks to the stock,” he said. “You can hold the stock, and if you’re willing to hold it for a year, you’re fine, because I think next year has bright things for them.”