Canadian Solar (CSIQ) Up Over 40% - What's the Fuss About?

The headlines for Canadian Solar (CSIQ) blare

"Doubling of profits!"
"Smashes Analysts Estimates!"

Wow, breathtaking stuff. My heart rate sure is up. Must of been a wonderful earnings report? Uhhh, not so much. Unlike First Solar (FSLR) which truly delivered some ground breaking stuff, Canadian Solar is like a retail stock that has lowered expectations so much that anything short of losses makes the stock rally massively. I am still not buying the hype. This plays on my theme of speculators... err investors too in love with massive revenue growth but not looking at what matters in the end.... profits.

Let's take a closer look at the numbers.

Revenue surged year over year from $17.8M to $97.4. Impressive in anyone's estimation

Last year on that $17.8M in revenue they generated gross profit of 17% and EPS of $0.01 EPS

Now a year later with an additional 80 MILLION of revenue, that EPS doubled to.... $0.02 EPS. Exciting! Not so much. Gross margins? Down to 6.5%. But hey that's better than last quarter when they managed to sell their product at below cost. (yes that means a loss).

On top of that they have continued to shuffle almost all their profits to "management" - earnings would of been $.11 if not for the quarter after quarter handoff of almost all profits to management (this quarter it was $2.4M) This is similar to the amounts handed off the past 2 quarters of public life as Canadian Solar struggles with profitability.... each quarter the management got the lions share of all public profits.

Let's take an even closer look at the numbers shall we? Gross profit was $6.34M
Gross expenses? $7M
So they actually lost nearly $700K running the business (and it would be worse if they actually spent any change comparable to peers in R&D spendings)
So how did they manage a profit?
They somehow generated $1.7M further in their P&L on "Others Net"
So one would need to dig into the SEC documents to see what "Others Net" is, but the bottom line is this was another losing quarter on operations... despite the headlines. "Others Net" did not appear in Q1 or Q2 this year, but somehow appeared out of the blue this quarter. Hmmm....

If you back out the $1.7M in "Other Net" Canadian Solar lost $1.2M this quarter or close to 5 cents. Of course 80% of people in solar stocks today won't be reading the P&L statement, they never get past the headline number....

So on the bear side, gross margins have been destroyed from a year ago, and with all that massive revenue growth they can only add 1 cent of EPS (post management getting "theirs").

The bulls will argue - well now the future is looking bright (pardon the pun) - increased guidance (more revenue which will generate a lot lower profit than competitors), 90% of polysilicon secured for 2008 (ok I will give them that, that is a *GOOD* thing), and in house cell mfg (also I agree, a good thing as it should help the close to industry low margins). But don't let today's huge ramp in stock price make you forget the fundamentals. While Canadian Solar is shuffling from negative gross margins to + 6%, the better executing companies in this sector are at worst doing upper teen gross margins and the better are in the lower 20s.

The company is guiding for 8M-8.5M non GAAP operating income for next quarter (which will be an improvement), and of course the typical $2.5M or so will go to management. But next quarter it appears they will finally be making money from making solar products (they didn't this quarter, no matter what the headlines blare)....

With expectations so low for this name, any positive news would be greeted as triumphant but if you are looking for 'best of breed', there are far better choices in the solar space... just about everything else in fact.

SA/SS

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