What: Shares of solar manufacturer Canadian Solar (NASDAQ:CSIQ) cratered as much as 21% today after it reported disappointing guidance for the third quarter.
So what: Second-quarter revenue rose just 2.1% to $636.7 million and net income of $17.9 million, or $0.31 per share, was down 68% from a year ago. Earnings easily beat the $0.13-per-share estimate from Wall Street, but it wasn't the second quarter that investors were worried about today.
Management said that an increase in panel shipments to the U.S., which comes with hefty tariffs, would have a negative impact on margins in the third quarter, and there are no Canadian project sales to offset that impact next quarter. Gross margin is expected to fall from 15.2% in the second quarter to 12%-14% in the third quarter, which likely means that profits will be lower instead of increasing to $0.40 per share as Wall Street expected.
Now what: Canadian Solar has been a big beneficiary of windfall profits from Canadian projects in the last year, but with those projects being completed by the end of 2015, we're beginning to see what the long-term health of the company really looks like. That's a big reason that the declining margins are so concerning. Without high-margin projects, which were a one-time event, Canadian Solar may not even be profitable at all, and that's very different from the stock that trades at a 4.1 P/E ratio right now.
Given the uncertainty and the lack of a sustainable competitive advantage, this isn't a solar stock I would be buying today. I would wait to see an improvement in margins after the Canadian projects before buying into this solar manufacturer.
Travis Hoium 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.