Since it's one of the biggest solar manufacturers in the world, you might think that Canadian Solar Inc. (NASDAQ:CSIQ) is a highly successful company and a great investment. But that hasn't been the case over the last few years, and since it went public, Canadian Solar has had a rocky road.
Heading into 2018, the company has a potential buyout on the table, but may also stay public, giving investors exposure to the upside or downside of the business. Here's what to look for, no matter how the buyout offer goes.
What if Canadian Solar is bought out?
The buyout offer for Canadian Solar comes from the company's own CEO Shawn Qu, but the offer is nonbinding. We've seen offers like this become more concrete and end in a buyout, but we've also seen them fall apart, so it's far from guaranteed that a deal will come to fruition.
What's being offered is $18.47 per share for the company's stock, a 12.7% premium to Tuesday's closing price. That's not a bad gain for a stock, and gives at least some upside if Canadian Solar is taken private.
Canadian Solar's operations could be improving
If the buyout doesn't go through, investors will still own Canadian Solar's ongoing operations. And there's beginning to be a lot to like there.
Canadian Solar estimates it will manufacture 10.3 GW of solar panels, or about 10% of all solar panels worldwide, by the end of 2018. It's also a leader in new technology like mono PERC solar cells, which make solar panels more efficient and give better performance in harsh conditions.
This has translated to some encouraging signs on the financial front, where management's fourth-quarter guidance was fairly strong: $1.04 billion to $1.08 billion in revenue on shipment of 1,650 MW to 1,750 MW of solar panels, and gross margin of 16.5% to 18.5%. Most of those sales are solar panels, not projects that can be lumpy from quarter to quarter, but it's encouraging to see gross margin in the high teens for solar panels. If that continues, Canadian Solar could be sustainably profitable in the long term.
The project business could be a drag
The drag on Canadian Solar's business could be solar systems: large solar farms the company is building on the balance sheet and then selling to investors. For example, the company recently reduced fourth-quarter guidance because the sale of 703 MW of projects in California didn't close in 2017 and will instead close in 2018. The impact was a reduction of $730 million in revenue and $20.4 million in gross margin (at the midpoint of given margin ranges).
The implied margin of just 2.8% for solar projects in the U.S. is astonishingly low, and may be the new norm for the industry. The problem is that Canadian Solar has 1.42 GW of projects in operations, with another 1.60 GW of late-stage developments ready to be built around the world. These projects could drain the balance sheet and may even be money-losers over the long term.
It's hard enough to compete as a global solar manufacturer, but being a project developer on top of that is nearly impossible. Leading companies like First Solar and SunPower are reducing their exposure to utility-scale project development, and it may be time for Canadian Solar to do the same. Otherwise, margins may not remain in the high teens for long.
The best year yet?
Given a potential buyout and strong demand globally for solar panels, I think Canadian Solar's investors are in for a good year. But the upside is limited by the management-led buyout, and I don't think there's likely to be any windfall events in 2018, like high-margin project sales, to drive margins higher for solar panels or projects. So, it won't be the company's best year yet, even if 2018 is a step on the road to a more sustainably built business long-term.