PPRW Premier Power Renewable Energy Inc (CE)

Canadian Solar Inc. (CSIQ) reported an adjusted EPS of 44 cents in the first quarter of fiscal 2011, beating the Zacks Consensus Estimate of 41 cents. The company’s results also surpassed the year-ago quarterly earnings of 3 cents. The upside came from higher shipments, increasing margins and cost efficiencies from increased in-house cell production.

On a reported basis, Canadian Solar reported an EPS of 13 cents versus 3 cents in the year-ago period. The 31-cent variance in the reported and adjusted EPS of the reported quarter stemmed from a $17.2 million loss from foreign exchange hedging.

Operational Performance

Canadian Solar had revenues of $443.4 million, beating the Zacks Consensus Estimate of $424 million. Revenues were however down 2.1% from $452.7 in the fourth quarter of 2010 and up 31.6% from $336.9 million in the first quarter of 2010.

Solar module shipments in the reported quarter totaled 244 MW, versus 185 MW in the first quarter of 2010. Canadian Solar's upside in quarterly sales came from its global markets with Europe continuing to be its largest contributor. Revenues from the European market in the reported quarter accounted for 75.6% of total sales, down from 88.5% in the year-ago quarter.

However in real terms, revenues from the European market increased to $335.4 million from $298.2 million in the year-ago quarter. Canadian Solar has significantly increased its sales to the Asia Pacific region and America as part of its market diversification strategy.

The company generated $54 million in revenues from the Americas in the reported quarter compared to $19.1 million last year. Asia and others accounted for $54 million of revenues, compared to $19.6 million last year.

In the reported quarter gross profit was $65.3 million, down 15.1% from $77 million in the fourth quarter of 2011 and up 55.8% from $41.9 million in the first quarter of 2010. Gross margin was 14.7% in the first quarter of 2011, compared to 17.0% in the fourth quarter of 2010 and to 12.4% in the first quarter of 2010.

The sequential decline in gross margin was primarily due to lower average selling prices, relatively high raw material costs and costs associated with normal holiday-related factory shutdowns. The year-over-year increase in gross margin was primarily due to cost efficiencies from increased in-house cell production, partially offset by higher silicon costs. Overall net income came in at $5.9 million, up 292.5% from $1.5 million in the first quarter of 2010.

Financial Condition

Canadian Solar reported cash and cash equivalents of $246 million at the end of the reported period, down from $288.7 million at fiscal-end 2010. Long term borrowings increased to $80.1 million from $69.5 million at fiscal-end 2010.

Outlook

Canadian Solar is a vertically-integrated manufacturer of silicon ingots, wafers, cells, solar modules and custom-designed solar power applications. The company sells its products to customers worldwide, spread across Germany, Spain, the U.S., France, the Czech Republic, Italy, South Korea, Canada and China.

Canadian Solar offers one of the broadest crystalline silicon solar module product lines in the industry, ranging from modules made of medium power, low-cost upgraded metallurgical-grade silicon, to high efficiency, high power output mono-crystalline modules, along with a range of specialty products.

Canadian Solar's standard solar modules are sold to distributors and system integrators, and specialty solar modules and products to various manufacturers, who integrate these solar modules into their own products or sell and market them as part of their own product portfolio.

Canadian Solar remains on track to expand its annualized capacity for solar cells to 1.3GW, and annualized capacity for modules to 2 GW, both by mid-2011. For full year 2011, the company reiterated its previous guidance of shipments of approximately 1.2 GW to 1.3 GW. For the second quarter of 2011, shipments are expected to be in the range of approximately 245 MW to 255 MW, with gross margin expected to be between 13% and 15%.

Canadian Solar’s China-based manufacturing assets have a distinct cost advantage over its peers. The company also pursues a balanced and diversified supply channel mix by entering into long-term supply contracts and toll manufacturing arrangements. In addition to in-house solar cell, wafer and ingot manufacturing, it is also ramping up its internal solar cell capacity to cut back its reliance on third party solar cells for the manufacture of solar modules.

In the near-term however, the benefits of its ongoing cost reduction program were however offset by higher than forecasted wafer prices on the spot market, higher polysilicon prices and higher non-silicon materials costs, including silver paste.

Also, in the near-term its shipments were curtailed by higher solar cell prices in the market, which were eating into its margins. The company is addressing this by ramping up its captive solar cell capacity. However, it will take some time until the company becomes fully self-sufficient for its solar cells requirements.

Canadian Solar currently has a short term Zacks #5 Rank (Strong Sell) in line with peers like JA Solar Holdings Co. Ltd. (JASO) and Premier Power Renewable Energy Inc. (PPRW). Over the longer run, we maintain our Neutral recommendation on Canadian Solar shares.

 
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