Why Canadian Solar's Shares Could See a Run Up

In the past year, Canadian Solar (CSIQ) shares have fallen nearly 30% as the U.S. solar industry struggles with excess supply, increasing global competition for low-cost international producers, drooping solar panel prices and a fossil fuel-friendly administration.

But on Monday morning, the company's stock was surging more than 3% shortly after the opening bell thanks to one unlikely ally: perpetual solar bear Gordon Johnson of Axiom Capital.

Johnson, who until Monday did not have a single Buy rating on any of the solar stocks in his coverage universe, initiated coverage of Canadian Solar with a Buy rating and an $18 year-end 2017 price target. 

That's a 41% increase over CSIQ's Thursday close of $12.72 a share and an uncanny move for Johnson who in late February initiated coverage of CSIQ peer First Solar (FSLR) with a Sell rating and a $21 year-end price target. First Solar shares were trading at $37.83 apiece at the time. 

The reason for Johnson's praise of Canadian Solar, however, has little to do with his outlook on the U.S. solar industry, which he has repeatedly lambasted over the past few years-- out of the 21 stocks Johnson's boutique shop covers, Canadian Solar is the only Buy rating. 

Rather, the analyst suspects CSIQ is just undervalued considering what its "in-the-money" solar project assets could be worth on the auction block. In essence, Johnson argues the sum of the parts is greater than the whole. 

The analyst points to the stock performance of First Solar and SunPower (SPWR) between June 29, 2012, and Dec. 31, 2015, as an example of the things to come for Canadian Solar. 

Both companies during that time frame, according to Johnson, had solar project assets that they could sell for a cash profit that, in aggregate, would provide value far more than each company's market capitalization plus net debt load. And Wall Street's sentiment on the solar industry in mid-2012, similar to that of today's market, was less than enthusiastic, perhaps distracting investors from what Johnson calls the "Golden Egg" of First Solar and SunPower.

But now it is the Ontario-based and Nasdaq-listed Canadian Solar who has the Golden Egg, Johnson asserted in a Monday note. 

Using Canadian Solar's recent sale of two solar power plants in China, which totaled 69.5 megawatts in capacity, to Shenzhen Energy Group for about $99.8 million, or $1.44 per watt, Johnson argues CSIQ's remaining 198 megawatts of operational Chinese projects alone are worth about $284 million.

Moreover, the analyst suggests CSIQ's U.S. solar project assets are worth $1.4 billion, or $5.29 per share, given that the company was offered $700 million for an equity portion of its 808-megawatt portfolio.

Axiom also is ascribing a value of $9.52 per share to the company's various late-stage Japanese assets and a negative $60 million value for its module business. 

The firm is not giving CSIQ credit for its 189.5 megawatts in operational projects in Japan, the United Kingdom or Spain as it does not believe those projects will be sold. 

All-told, Axiom feels the company is worth more than $1 billion, far above its $700 million market cap Monday. 

"With CSIQ's profit likely to materially outperform its peers as in-the-money solar project assets are sold, we rate the stock a BUY."

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