Why Canadian Solar Inc. Shares Plunged Today

Is Canadian Solar's drop meaningful? Or just another movement?

May 16, 2014 at 4:30PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Canadian Solar (NASDAQ:CSIQ) fell nearly 12% Friday after the company released mixed first quarter results and weak revenue guidance.

So what: Quarterly revenue came in at $466.3 million compared to $519.5 million last quarter, well above Canadian Solar's guidance for a range of $415 million to $430 million. Analysts, on average, were only expecting revenue of roughly $432 million. However, that only translated to earnings of $0.07 per diluted share, compared to analysts' estimates for earnings of $0.12 per share.

Now what: Canadian Solar CFO Michael Potter explained that, while both shipments and revenue for Q1 exceeded their expectations, gross margin came in at 14.7%, and was negatively affected by roughly 1% by the effects of a small fire in the company's cell factory. Still, he insisted "We hope to recover that from insurance later this year."

But Canadian Solar also sees second quarter module shipments in the range of 600 MW to 630 MW. This should translate to revenue of $560 million to $590 million, with gross margin between 17% and 19%. Analysts were modeling higher second quarter revenue of $633.6 million.

In addition, Canadian Solar reaffirmed guidance for annual module shipments to be in the range of 2.5 GW to 2.7 GW, including 400 MW to 500 MW of project recognition. It also expects to build and/or hold up to 250 MW of project assets this year. This should result in 2014 revenue of $2.7 billion to $2.9 billion, compared to analysts' estimates for sales of $2.88 billion.

In the end, it's hard to blame the market for taking a step back today given both the earnings miss this quarter and disappointing top-line guidance. That said, shares are currently trading at a rock-bottom 0.8 times trailing 12-month sales and 5 times next year's estimated earnings. Even if those estimates drift lower as analysts have time to fully digest today's news, I think the stock is worth a deeper look for patient, long-term investors.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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