Shares of Canadian Solar (NASDAQ: CSIQ) rallied over 9% on Thursday after the company released its 1st quarter results. While revenue fell, the company’s loss per share was smaller than expected, and 2nd quarter guidance was raised. Canadian Solar is based in Guelph, Canada and manufactures products for the solar power industry under its own brand name.

The company reported a GAAP loss per share of -$0.29, which was $0.13 ahead of analyst estimates. Quarterly revenue came in at $484 million. While revenue was $16 million ahead of consensus, it marked a 66% drop from the same quarter last year.


Managing Expectations

During the quarter the company shipped products with capacity of 1,575 MW, 20% below the previous quarter and ahead of guidance. The gross margin fell from 28% to 22.2% but was also higher than the guidance provided the previous quarter.

Revenue guidance for the next quarter was raised to between $970 million and $1 billion, well ahead of the $840 million analysts were looking for. Canadian Solar does have a history of under promising and over delivering.

The company also announced that CEO Dr. Shawn Qu had taken a medical leave of absence and that Yan Zhuang, the Company’s Senior Vice President had been appointed acting Chief Executive Officer while he is away. It is understood Dr. Qu was injured in an accident earlier in the month.


Lumpy and Unpredictable Revenue Streams

This set of results has to be viewed within the context of previous quarters. The share price topped $40 in 2014, before drifting to a low of $10.83 in 2016. By March this year, it had doubled but sold off after releasing better than expected 4th quarter earnings accompanied by lower expectations for the first quarter.

The selloff was probably overdone, but the amended guidance did highlight how unpredictable and lumpy the company’s revenues can be. For example, when guidance was lowered in March, the company said its gross margin might fall from close to 30% to as low as 16%.

There are several reasons for unpredictable and volatile revenue streams from a company like Canadian Solar. Rapid advances in technology mean costs are falling, but this does lead to margins rising and falling from quarter to quarter. The exact timing of large projects depends both on when clients make decisions and on the company’s capacity to implement a project.


Does the Current Stock Price Offer Investors Value?

Historically the stock has mostly traded on a multiple of between 4 and 6, suggesting the valuation is not demanding but not as cheap as it appears either.

Canadian Solar’s current stock price values the company at just 40% of its sales for the last 12 months, reflecting the fact that its margins are tight. The gross margin over the last five years has ranged between 7% and 21%, while the net margin has ranged from minus 15% to 8%. There is little reason to expect the net margin to exceed 8% anytime soon.

If the company earned 8% on 12-month revenues of $2.8 billion, it would be trading on a multiple of 5, while a more conservative margin of 4% would put the multiple at around 10. Historically the stock has mostly traded on a multiple of between 4 and 6, suggesting the valuation is not demanding but not as cheap as it appears either.

Long-term investors will probably have to endure a fair amount of volatility, and would only be properly rewarded for that if they bought at cheaper levels. In the meantime, however, the stock may provide trading opportunities to active investors.

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