Canadian Solar Is Facing More Challenges Than It Appears

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Investors are cheering Canadian Solar's (CSIQ -0.23%) second-quarter earnings, which included more shipments, higher revenue, and better margins than management's own guidance. Normally, that's enough to get investors excited about any company.

What didn't get much discussion in the earnings release were the factors presenting challenges for competitors First Solar (FSLR 1.71%) and SunPower (SPWR -9.78%). Namely, what's going to happen in 2017? The answer may not be something investors want to hear.

What we learned

Let's start with what was reported for the second quarter. Revenue was $805.9 million on shipments of 1,290 MW of solar panels. Gross margin was a solid 17.2% and net income was $40.4 million, or $0.68 per share.  

There are also 472 MW of solar power plants in operation that are held on the balance sheet. Those projects could be monetized eventually to pay down $2.3 billion in debt.

The profitability isn't terribly high given the incredible amount of solar panels sold. That brings us to the uncertainty going forward for Canadian Solar.

What we didn't learn

Investors who watch solar closely shouldn't be surprised that second-quarter numbers were good from Canadian Solar. First Solar and SunPower have reported similarly strong numbers and both China and the U.S. are installing solar rapidly this year.

What's questionable is how much demand there will be in 2017. Estimates are that China installed 20 GW of solar panels in the first half of the year, compared to 59 GW globally in 2015, and the U.S. is on its way to installing 14.5 GW of solar in 2016, according to GTM Research.  

But China is cutting solar subsidies and the extension of the solar investment tax credit in the U.S. has led to little urgency for utilities to sign solar power purchase agreements for 2017. So, demand for solar panels and projects is expected to fall. In fact, spot market prices are already starting to fall for solar panels.

You can see this impacting Canadian Solar, First Solar, and SunPower below. This is the contracted backlog each company has for the rest of 2016, 2017, and 2018 and beyond. I only included the U.S. and Japan in Canadian Solar's numbers because dates aren't disclosed for the rest of the world and a vast majority of international projects will be completed in 2016 as well.

Data source: Company SEC filings and earnings presentations. Calculations may be approximate depending on project timing.

You can see that project demand for 2017 falls off the map. That's why SunPower's guidance was weak and why investors are worried about First Solar's prospects for next year. Canadian Solar hasn't given guidance, but it's worth speculating that financial results won't be good for them either.

Don't expect the good news to last

The narrative companies create in earnings can often determine where their stocks head post-earnings. But long term, it's financial performance that drives companies.

At First Solar and SunPower, I think weakness in 2017 is something they see coming and they're preparing investors for that reality by giving guidance and adjusting manufacturing plans accordingly. Eventually, they plan to make a comeback in 2018.

Canadian Solar give a mostly rosy outlook for the future, but hasn't yet said much about 2017. It could see weakness coming and they could be more bullish than rivals. But how the company performs in 2017 will do more to determine where this stock goes more than a quarter when nearly everyone in solar is making money.