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Why Canadian Solar Stock Just Popped 13%

By Rich Smith - Aug 15, 2019 at 11:31AM

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Weak sales guidance can't undermine a stellar Q2 profit.

What happened

Shares of solar power company Canadian Solar (CSIQ 5.50%) are on a tear -- up 13% as of 10:50 a.m. EDT after reporting estimate-crushing earnings for its fiscal second quarter of 2019 this morning.

Expected to report $0.30 per share in profit for the quarter on sales of $990.3 million, Canadian Solar instead told investors today that it earned at least twice that -- $0.77 per share pro forma and $1.04 per share as calculated according to generally accepted accounting principles (GAAP).

Solar panels with sun in the background.

Image source: Getty Images.

So what

Sales for the quarter raced past $1 billion, up 59% year over year and easily beating expectations. Cost of goods sold climbed faster than revenues, but operating costs were held in check. The result was that on the bottom line, Canadian Solar scored a clean quadrupling in net profit over the $0.26 per share it had earned in the year-ago quarter.

The company did not include a cash flow statement in its earnings release, so it's hard to say if free cash flow fully measured up to reported earnings. However, management did note that "net cash provided by operating activities was approximately $225.8 million." Relative to reported net income of $60.2 million, that looks like a good omen.

Now what

Now, not all the news was good. Management warned, for example, that Q3 revenue will probably range from only $780 million to $810 million -- whereas Wall Street wants to see more than $1 billion in Q3.

By my calculation, that means that when you combine revenues actually booked in Q2 with those expected to be booked in Q3, the result is that Canadian Solar is actually expecting to generate sales for these six months of only about $1.8 billion, versus the $2 billion that Wall Street had anticipated. Also, management's updated guidance for the full year sees revenues ranging from $3.5 billion to $3.8 billion.

Again, at the midpoint, this would appear to fall short of Street expectations for $3.7 billion in full-year revenue. The inevitable conclusion is that sales that exceeded expectations in Q2 are now going to slow down as the year progresses. Then again, if Canadian Solar keeps growing profits at anywhere near the rate it did in Q2, that might not matter much at all.

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