While the evolution from conventional power sources to renewable energy sources is more pronounced in some markets than others, the general trend is undeniable. Consequently, savvy investors are looking to diversify their portfolios, carving out niches for companies that provide exposure to the industry -- companies like Plug Power (PLUG 0.48%), a leader in the development of fuel cell solutions, and Canadian Solar (CSIQ +13.46%), a global leader in the manufacturing of solar modules.
Both stocks have soared so far in 2019. With the S&P 500 rising nearly 19%, Plug Power and Canadian Solar have soared 86% and 46%, respectively. While shareholders have shown considerable interest in both stocks, those who have been on the sidelines may be wondering which one currently represents the better opportunity.
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Investigating the income
Stacking up Plug Power and Canadian Solar against each other in terms of their sales and profitability is no simple feat. Canadian Solar, for example, generates significantly more on the top line than Plug Power; the former reported sales of $3.75 billion in 2018, while the latter booked sales of $175 million in 2018. But the disparity between the two companies shifts when examining them in terms of growth. Due in large part to a blockbuster deal with Amazon and an extensive partnership with Walmart, Plug Power has grown sales at a compound annual growth rate (CAGR) of 45% over the past five years, while Canadian Solar's revenue has risen at a more measured 18% CAGR.
When comparing the companies from the perspective of profitability, however, it becomes clear how much more brightly Canadian Solar shimmers than its green energy peer.
| Company | 5-Yr. Avg. Gross Profit | 5-Yr. Avg. Gross Margin | 5-Yr. Avg. Operating Income | 5-Yr. Avg. Operating Margin | 5-Yr. Avg. EBITDA | 5-Yr. Avg. EBITDA Margin |
|---|---|---|---|---|---|---|
| Plug Power | ($1.32) million | (2%) | ($63.9) million | (58.5%) | ($66.5) million | (67.6%) |
| Canadian Solar | $598 million | 18.1% | $245 million | 7.4% | $393 million | 11.9% |
Data source: Morningstar. Chart and calculations by author. EBITDA = earnings before interest, taxes, depreciation, and amortization.
A more mature company, what Canadian Solar lacks in rapid growth it makes up for with consistent profitability. Plug Power's bulls, meanwhile, may contend that this is much ado about nothing since the company is still growing, but it's worth noting that Plug Power is hardly a newcomer; it was incorporated in 1997. Canadian Solar, incidentally, was founded four years later. Moreover, there's no guarantee that Plug Power will ever reach an inflection point that results in the company turning a consistent profit.
Winner: Canadian Solar
Hanging in the balance
Having gained some insight into the two companies by way of their income statements, we can further evaluate them by examining their balance sheets. In terms of Canadian Solar's leverage, some investors may be tempted to reach for a yellow flag since the company ended the first quarter of 2019 with a net debt-to-EBITDA ratio of 5.4. For some context, we can consider another solar manufacturer, First Solar, which is in a much more secure position, illustrated by the company's net cash position of $1.55 billion.
But in relation to Plug Power, which doesn't generate positive EBITDA, the comparison isn't quite apples to apples. Unable to grow cash organically, Plug Power relies on consistently raising more capital through the issuance of debt and equity to keep the lights on, representing a far more precarious position than that of Canadian Solar. In fact, Canadian Solar has shored up its balance sheet, reducing its debt by more than 17% over the past five years.
PLUG Shares Outstanding data by YCharts.
Winner: Canadian Solar
At what price?
Since Plug Power has been unable to generate profits or positive cash flow, the traditional price-to-earnings and price-to-cash flow metrics serve little use. Therefore, we can consider the two stocks on their sales multiples. Trading at 3.01 times trailing sales, Plug Power is changing hands at a discount to its five-year average multiple of 4.93. Canadian Solar, conversely, trades at 0.46 times trailing sales, slightly higher than its five-year average multiple of 0.39. Considering the S&P 500's P/S ratio is currently 1.53, it appears that Canadian Solar represents the more attractive price tag. Unconvinced? Canadian Solar also trades at a P/E ratio of 7.3, a notable discount to its five-year average multiple of 12.1.
Winner: Canadian Solar
A powerful pick in renewable energy
Helping customers to shift away from traditional power sources, Plug Power and Canadian Solar are both worthy candidates for investors considering clean energy options. Between the two stocks, though, the better opportunity is clear. Canadian Solar and its track record of profitability is much more alluring than Plug Power, which has consistently failed to translate its top-line growth to growth on the bottom of its income statement. Representing a more hale and hearty option in terms of financial health, Canadian Solar further outshines Plug Power, and its more attractive price tag is merely the clincher.
