Stock pick: Canadian Solar Inc. shines as renewable energy heats up

Guelph based company is among the largest solar firms on the planet

Chart showing trailing 12-month stock performance of Canadian Solar Inc.

As solar power grows in popularity, many of world’s leading solar companies are starting to become household names. While the big brands, such as SolarCity and First Solar, are decent buys in this growing sector, there’s one lesser-known Canadian company that investors may want to look at too.

Guelph’s Canadian Solar Inc. (NASDAQ: CSIQ) designs and develops solar cells that are used residential, and industrial projects and solar farms that are then sold to independent power producers.

The $1.6 billion market cap company has been around for 13 years and generates about $3 billion in revenues a year. While it may not have the name recognition as some other operations, it is one of the largest solar energy firms on the planet.

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Analysts don’t follow it as closely as some other companies, but most of the people who do pay attention to the business have buy ratings on it. On July 7, FBR Capital upgraded the stock from a hold to a buy, while Canaccord Capital initiated coverage with a buy rating on July 2.

There are several reasons why analysts like the company, but the big one is that solar in general is becoming more popular. Josh Baribeau, a Canaccord Capital analyst, wrote in his initiation report that the “solar market will continue to experience rapid growth as the U.S., Japan, China, and emerging markets drive more adoption of clean, renewable energy.”

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Canadian Solar, which is one of the lowest-cost solar manufactures in the world, has exposure to many of these growing international markets. Pierre Maccagno, a senior research analyst with Dougherty & Company, wrote in a March 11 that it is more heavily exposed to Canada, the U.S. and Japan. It’s also reduced its exposure to Europe, which isn’t growing as quickly as other markets. Baribeau added the company has a $2.7 billion project backlog.

Maccagno expects revenues to come in at about $2.83 billion this year and increase by about 20% to $3.37 billion in 2015. Earnings per share will jump about 52% between 2014 and 2015, he writes.

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While it’s got great growth potential, it’s also undervalued, writes Maccagno. By his estimates, the company is trading a 0.77 times enterprise value-to-sales. It’s Chinese peers are trading at 0.9 times EV-to-sales, while U.S. companies are trading at 1.62 times EV-to-sales.

The stock is currently selling for $30 a share and if solar grows like the way many people expect it too, the stock will see significant gains. Baribeau thinks it could hit $43 over the next 12 months, while Maccagno has a $51 price target on the business.