Canadian Solar Inc Earnings: Will the Future Stay Bright?

On Friday, Canadian Solar (CSIQ 3.89%) will release its quarterly report, and investors have been nervous about the solar company's future prospects in light of its recent share-price decline. Even though the company's stock typically trades in line with China-based solar stocks, Canadian Solar shares a lot in common with U.S. solar giants SunPower (SPWR -3.17%) and First Solar (FSLR 0.71%) and has increased its exposure to large projects rather than simply producing solar panels.

Canadian Solar has its headquarters in Canada, but the bulk of its manufacturing capacity is in China, and that links the stock's prospects to other Chinese players in solar. Canadian Solar shares have seen extreme volatility over the past several years, as the prospects for China's solar industry looked incredibly dim until last year. In 2013, though, Canadian Solar soared as it became apparent that the company could emerge as one of the survivors of the Chinese-solar shakeout. Now, though, investor skepticism about high-momentum stocks across the market has hit Canadian Solar's shares. But will the business keep improving? Let's take an early look at what's been happening with Canadian Solar over the past quarter and what we're likely to see in its report.

Source: Canadian Solar.

Stats on Canadian Solar

Source: Yahoo! Finance.

Will Canadian Solar earnings keep rising?
In recent months, investors have had mixed views on Canadian Solar earnings, cutting their first-quarter estimates by almost 75%, but raising their full-year 2014 projections by 13%. The stock has struggled, losing more than 30% of its value since mid-February.

Canadian Solar's fourth-quarter results didn't make investors too happy about its future prospects. Initial preliminary results revealed that even though shipment volumes had increased dramatically from the third quarter, actual revenue didn't rise by nearly the same amount, and margins fell precipitously.

Source: Canadian Solar.

Yet the confusing thing about Canadian Solar's results is that you have to dig deeper into the numbers to figure out which part of the company's business is doing well. Selling solar panels is a low-margin business with limited potential for growth. But like First Solar and SunPower, Canadian Solar also does extensive business in large-scale solar project development, and the total revenue on such projects can be 10 times what you'd see on a panel sale on a per-watt basis. When Canadian Solar announced its final fourth-quarter results, the mix of project revenue was far less favorable than in previous quarters.

National subsidies and policy decisions have a huge impact on Canadian Solar and its peers. Last month, news that China might reduce its new solar installation volume from 12 gigawatts to 11.5 gigawatts sent Canadian Solar and its Chinese peers down sharply. The solar industry has relied on a big push in China to develop new projects, and even the hint of small reductions is enough to affect stocks in the sector. But even with slightly slower growth, the global opportunity for new solar installation remains strong, especially as technological advances increase efficiencies and reduce costs.

In the Canadian Solar earnings report, watch closely to see how well the company does at attracting large-scale solar projects. As First Solar and SunPower work hard to secure high-margin business, Canadian Solar still has an opportunity to get its share of that lucrative market and improve its overall profitability back to the levels that sent its stock soaring in 2013.

Click here to add Canadian Solar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.