Will the Sun shine on Canadian Solar?
Opdateret: aug. 22
You might remember that I have previously made a post where I compared the historical numbers of six different companies operating in the solar sector. One of the companies that remained to be looked at was Canadian Solar, and this is my analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
Some months ago I made this post. (I just updated it the same day, as I have updated this analysis). Since then I have made some calculations on the three remaining companies. And while could seem underwhelming Canadian Solar based on some of the historical numbers, I have realized that out of the three companies that was left, it is in my opinion by far the company with the best valuation.
Canadian Solar is a company that manufacture solar modules for residential and commercial systems and runs large scale solar projects, the company was founded in 2001. They also corporate with both Ikea and Amazon, where their solar panels are used on their warehouses around the globe. I have been looking into what distinguish Canadian Solar from other manufactures in order to determine if the company have a moat. I have come to learn that Canadian Solar is often considered the best value for money. Their panels are less efficient than the most efficient solar panels, however they are 20-30 % cheaper for only a small drop in efficiency. I believe it gives them a price moat, even though it isn't as strong as I would like it to be. I guess all solar panel companies also have a switching moat, as I believe most buyers are not going to switch providers all of a sudden, especially not when solar panels usually come with 10-12 years warranty.
Their CEO is Dr. Xiaohua "Shawn" Qu. He is not only the CEO but also the founder of the company. If you have read my previous analyses, you would know that I like when the founder is also the CEO. In general that means that the CEO is more interested in growing the company than his own wallet. He has a BSc in applied physics from Tsinghua University in Beijing, a MSc in physics from the University of Manitoba and a PhD in material science from the University of Toronto. Prior to founding Canadian Solar, he worked on a solar power project at Ontario Power Generation. Once he founded Canadian Solar, he didn't expect it to be a multi-billion dollar company, he just wanted to work in a small company with renewables that he thought would be good for human beings, and he just wanted to be able to feed his family. It all changed though, as he won the contract for a solar device that would keep car batteries charged when vehicles were sitting at outdoor parking lots at Volkswagen's Mexican operation. He has shown his great management skills, as he navigated Canadian Solar through the issues that tailed the Financial Crisis, which resulted in cuts in European subsidies that ended pushing panel prices down and made both large and small players in the solar panel sector collapse. Dr. Qu is known to be very low key, modest, unassuming but extremely deliberate and very intelligent. It is said that his success hasn't changed him much but he himself has acknowledged that he has gotten less anxious about the business since he has delegated a lot of the day to day work to his management team.
We have determined that Canadian Solar has a price and switching moat, even though they are not as large as we would like them to be. We really like the management as well. Now let us look into the big five numbers in order to see, if Canadian Solar does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. The numbers of Canadian Solar are a bit underwhelming, as they only meet the requirement in one of the benchmarks. However, they are not far from meeting the requirements in the rest of the benchmarks excluding the oldest one.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. It is a bit of a mixed bag for Canadian Solar. While they do meet or are close to meeting the requirements in the two oldest and the latest benchmarks, they are underperforming in the 5 years and 3 years benchmark.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again you see a mixed bag of numbers. Three of the benchmarks are fantastic, while two are disastrous.
The Equity Growth Rate is the most important of the growth rates. And finally Canadian Solar performs as you would like. They are above 10 % in all of the benchmarks. All right, they are not increasing from every benchmark to benchmark but the numbers are very solid and what you would like to see in a company that you are considering to investing in.
Finally we look into the Cash Growth Rates. It isn't the most important of the growth rates but it is a bit concerning to see numbers like these. You still need to look at the numbers overall and a bad cash growth rate shouldn't keep you from investing in a company but obviously, it is something you would like to monitor once investing in the company. And if you look at the numbers individually over a 10 year period and do not divide them into benchmarks, they look a little better than the numbers shown here.
In this paragraph I would like to make a summation of all the numbers. Canadian Solar is certainly a company where the different growth rates show different results. ROIC should be the most important number, and while it is a bit underwhelming, it doesn't necessarily keep me from investing in the company as it is close to meet the requirements. They meet all requirements in the equity growth rate, which is the most important of the growth rates, which makes me confident in investing in the company, despite some misses in some benchmarks in the EPS and sales growth rates. Obviously, the bad numbers in the cash growth rates need to be monitored. Nevertheless, overall I believe that the numbers are acceptable.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Canadian Solar, I can see that Canadian Solar has 4,56 years earnings in debt, which is above the 3 years that we would want. Obviously, we would like to see Canadian Solar to pay off some of their debt but 1,56 years, will not be the deciding factor, if I should invest in them or not.
Some of the numbers have been underwhelming. The reason why I'm still interested in the company is that you should remember that the numbers are historical. It is to be believed that the solar energy market will perform much better in the near future than it has done in the past. A report made by the Allied Market Research believes that the solar energy market will reach a value of $223,3 billion in 2026, which would be a compound annual growth rate of 20,5 %.
Furthermore, the Canadian Government has filed a complaint to CUSMA (Canada-United States-Mexico Agreement) regarding the tariffs on solar products from Canada. If CUSMA vote in favor for Canada it could be another catalyst for Canadian Solar.
Like all other companies, Canadian Solar has some risks as well. One way to look into their risks are to look into their annual report, where every company list a whole lot of different risks. I don't want to mention all of them here but the two that caught my eye were the following. One of the risks is that they are operating in a very competitive market, where the slightest dint in their reputation could be catastrophic, as many competitors are mirroring the same business model. Another risk factor, and one they mention in their annual report is if Governments reduce or eliminate subsidies and economic incentives for solar energy, which happened during the financial crisis in 2008.
All right, we have gone through the numbers, potential and risk regarding Canadian Solar, and now it is time for us to calculate a price for Canadian Solar. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS at 2,50, which is a bit higher than 2020 but lower than 2019 and 2018. I chose a Estimated future EPS growth rate of 15 (even though the solar energy market is expected to grow with 20,5 %, 15 % is the highest I use ), Estimated future PE 30 (which the double of the growth rate) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $75 and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Canadian Solar at price of $37,50 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need a positive Operating Cash Flow, which Canadian Solar didn't have in 2020, hence I cannot make calculations based on the 2020 numbers. However, you can see my calculations based on the 2019 numbers here: The operating Cash Flow last year was 600,11. The Capital Expenditures was 291,18. I looked through the annual report and saw that 279,18 was actually used on maintenance, meaning that it will be the number we use in our calculations. The Tax Provision was 42,07. We have 59,04 outstanding shares. Hence, the calculation will be like this: (600,11 - 279,18 + 42,07) / 59,04 x 10 = $61,48 in TEN CAP price.
The last calculation is the PAYBACK time. I also described in "MY STRATEGY". But with the Free Cash Flow Per Share from 2020 in minus, you can't make that calculation.
I believe that Canadian Solar has potential due to their great management and expected growth in the sector they operate in. I have some concerns about some of the numbers and the rather weak moat. Their 2020 results with a negative Operating Cash Flow is somewhat of a concern as well meaning that I would like to have at least 50 % discount to intrinsic value. It means that I would only considering increasing my position if the price is below the Margin of Safety price of $37,5.
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