What to Watch When Canadian Solar Reports Earnings

By Markets Fool.com

Solar company Canadian Solar has managed to survive the solar industry in an era where companies seem to go out of business every week. With first-quarter earnings due on Wednesday, May 11, there's both fear and optimism baked into shares.

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The optimism comes from the industry's high growth trajectory and a big expected profit this year. There's fear, however, that 2017 may be unstable, whichFirst Solar's and SunPower's earnings have done little to settle. With that in mind, here's what to watch for in the earnings report.

Image source: Canadian Solar.

Where are solar panel prices and margins headed?
Canadian Solar has done a great job of transitioning its business to more project development, but as it builds out manufacturing to 5.7 GW of module capacity by the end of the year, solar panel prices will drive the business.

The core problem with manufacturing solar modules, especially the commodity modules Canadian Solar makes, is that there's constant pressure on prices. This means that, however fast you grow capacity, revenue typicallygrows much slower. And the capacity that's built generates less and less money as it ages. For example, a line that produced a solar panel that sold for $1.50 per watt five years ago is still building solar panels, but now they sell for $0.50 per watt. To make money, manufacturers have to make a constant effort to reducecosts.

If solar panel prices stay relatively level, which they have for most of the past year, it'll allow Canadian Solar to cut costs and increase margins. That, too, would be a big help to its business in 2016.

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What does 2017 look like?
There's no doubt that 2016 will be a big year for Canadian Solar, as it will be for most solar companies, because of contracts designed to beat a reduction in the solar investment tax credit at the end of this year, which was subsequently extended. The company has 771 MW of projects to complete this year; it's in 2017 where the picture gets a little murkier.

One of the takeaways from First Solar's and SunPower's earnings was that residential and commercial demand is stable and growing, but utility-scale projects, like Canadian Solar builds, are another story.

Utilities have been hesitant to sign contracts for projects in 2017 and 2018 because of the rush in construction this year and the lack of urgency from state regulators. That could make for a year with far fewer self-developed projects, which is what has driven Canadian Solar's profitability recently. Look for management to lay out how good or bad 2017 is looking in the earnings release and conference call, because that's what solar investors are worried about today.

Higher-efficiency panels may be gaining steam in solar. Image source: SunPower.

What about efficiency?
One of the secrets of solar today is that efficiency is more important than ever. The more power you can squeeze out of a limited area, the more you can reduce the land needed, labor, and costs in each installation. Look at First Solar's resurgence as it's increased efficiency as a prime example of how important efficiency is. Trina Solar , Canadian Solar's major Chinese competitor, has also put a lot into efficiency efforts, recently announcing a 23.5% efficient large-area interdigitated back contact solar cell. This compares to 15%-17% for commodity solar modules, so it would be a big step forward. And, of course, SunPower is already shipping solar panels that exceed 22% efficiency.

Canadian Solar has built its business on the back of extremely low costs, currently at $0.41 per watt for solar panels, but it isn't a high-efficiency company. That could come back to bite it if that investment isn't made, so look for any sign that technology is improving. Scale may have won the last battle in solar panel manufacturing, but efficiency will likely win the next one.

The article What to Watch When Canadian Solar Reports Earnings originally appeared on Fool.com.

Travis Hoium owns shares of First Solar and SunPower. 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.