Which Solar Stock Can Best Drive Your Profits?

Marina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Canadian Solar (NASDAQ: CSIQ), Trina Solar Limited (NYSE: TSL) and Suntech Power Holdings (NYSE: STP) are suffering from the torrid supply-demand conditions prevalent in the solar energy market these days. In this article, I aim to deliver a clearer picture on where these solar energy companies stand. This will make a largely statistical case for which stock is the best bet for your profits.

Business updates

Canadian Solar has managed to end its reliance on Europe for revenue generation and currently earns a major part of its revenue from the Asian region. However, there is strong interest in the solar energy company from Ontario. The company shipped 1.54 GW in 2012 and expects to ship 1.6-1.8 GW in 2013. In the current year, the company plans to earn more than 50% of its revenues from engineering, procurement and construction as well as project development and total solutions. In the first quarter of 2013, the company's stock hit a 22-month high because of a surging demand for solar panels in Japan boosted the quarterly shipments beyond expectations.

Trina Solar has been outperformed by Canadian Solar in terms of the lowest cost of solar panels. Trina cut costs sharply in 2012 and 2013, however. In addition to a company-wide operating expense reduction program, the company strives to reorganize its business by separating its PV module unit from its systems business. On the flipside, the company currently has a troublesome commitment to pay over $14 billion under 52 contract agreements. That has locked the company into above-market prices for purchases of silicon from Hemlock Semiconductor, GCL-Poly, Jiangsu Zhongneng, OCI, and Wacker Chemie AG.

Suntech has arranged a prolongation of the maturity of its debt until Aug. 30, 2013. Since the company was unable to repay $541 million in debt in March 2013, Chinese banks have pursued the company. Its total debt position is indeed too large for the company to serve its debts. Due to this fact, the company's performance is becoming more volatile day by day and Suntech is losing market share to stronger players. Because of lack of financial recourses, the company is not able to upgrade its equipment and might become technologically obsolete in the foreseeable future.

Tracking financials

Canadian Solar’s revenue, operating income and net income have all been tarnished over the past two years because of higher costs of goods sold and low product prices. While sales may improve, Canadian Solar’s revenue has suffered due to weak product pricing as raw material became cheaper over time. Its earnings per share have been reported in the negative for the last two years, and this trend is expected to continue in the near future. In order to support the solar industry development in China, China Development Bank (CDB) is providing small loans in the range of $40-150 million to producers. None of the private commercial banks provides such loans to these companies because their continued operations do not make financial sense. Canadian Solar has also received the Yuan equivalent of $44 million from CDB.

With a price-to-book ratio of 0.7 and a price-to-sales ratio of 0.4, Trina Solar has a depressed valuation when compared to the stock market averages. The company tends to dive into the dark in 2014, as module prices stabilize and costs continue to go down. The valuation looks so bleak due to the risks associated with the stock and there is a fair reason for that.

Suntech's stock has lost 96% in its price over the last five years, as well as 21% over the trailing twelve months and 11% from the start of the 2013 year. I think that this paints a clear enough picture that we can stop discussing the company's other financial metrics.

Expectations for future

2013 might be a promising year for the solar industry. Even as surging supplies and low demand continue to haunt solar energy producers, reports from all across the globe suggest that the demand for solar energy is picking up. Forecasts suggest that US solar panel demand is set to surge by 20% in 2013, while aggressive development adopted by China and Japan is expected to push the demand in Asia 22% higher than last year.

The management at Trina Solar can regain the company’s former glory if it gets its act together. The solar industry is still young and has a long path to maturity.

I am afraid that Suntech won't be able to recover in the near future due to the company's inability to serve its debt. In addition to a huge amount of debt, it also has a high cost structure that puts the company under the knife. Furthermore, Suntech looks to be highly speculative as the stock has no fundamental value.

Canadian Solar seems to be a promising pick among the solar stocks for 2013 and 2014 because the market is expected to find equilibrium by the end of this year. It is the only stock with a price performance that suggests that it has an upside potential. Its main problem is the unfavorable global situation for the solar industry. As that is expected to improve in the next year, however, it would be wise to watch out for Canadian Solar’s stock price to grow exponentially.

Final verdict

Canadian Solar has already succeeded in decreasing its dependence on western markets by gaining most of its revenue from Asia. Now, it plans to work around tax issues and reenter western markets as well. This comes at a time when the dawn of solar energy finally seems just beyond the horizon. I recommend buying Canadian Solar today to ride the wave of profits throughout 2013 and 2014.

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Marina Avilkina 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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