When the market starts yawning at blowout earnings reports, you know the expectations have been set high. The danger at that point is being the one company to miss expectations and watching you stock sink faster than Charlie Sheen's career.
Canadian Solar (Nasdaq: CSIQ ) just found that out the hard way, when it recently reported earnings. The stock promptly fell by 18% and dragged the entire sector down with it.
Revenues were up by 78.1% from last year to $452.7 million in the quarter, as shipments reached 237 megawatts. But net income of $25.5 million, or $0.58 per share, fell short of analyst expectations of $0.65. Not something you want to do when competitors such as Yingli Green Energy (NYSE: YGE ) and Trina Solar (NYSE: TSL ) are crushing estimates and have seen their shares trade down over the past month.
As if missing earnings estimates weren't bad enough, Canadian Solar also expects its gross margin to decline to 14% to 15% in the first quarter from a measly 17% this quarter. That figure compares with a 31.4% gross margin at competitor Trina Solar. So with prices expected to fall during 2011, Canadian Solar doesn't have a lot of room for error.
On the plus side, although analysts may have been disappointed, investors didn’t exactly have high expectations for 2011 in the first place. Before this report came out, earnings per share were expected to be $2.12, and the stock currently trades near $11. That's a ridiculous P/E ratio of 5.2, so there's some upside potential if the company can perform better than Mr. Market currently believes it can.
Canadian Solar isn't coming close to being on life support, in the style of Evergreen Solar (Nasdaq: ESLR ) , but the company does face a lot of risk if prices fall this year and margins get squeezed further.
Solar stocks have been crushed almost across the board since Canadian Solar's report came out. Maybe it was time for a correction, but it looks as though Canadian Solar was the one pushing investors off the edge.
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