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On Dec 6, 2013, we upgraded our recommendation on Canadian Solar Inc. (CSIQ - Analyst Report) to Outperform from Neutral, based on the improving supply-demand imbalances in the solar photovoltaic market, which will likely lead to price stabilization and a wide global customer portfolio. North America’s biggest solar manufacturer currently holds a Zacks Rank #3 (Hold).

Why the Upgrade?

The company performed strongly in the third quarter 2013. Canadian Solar swung into profit in the reported quarter on the back of higher shipments and revenues. Its third quarter total revenue surged 50.6% year over year and total shipment of solar modules in the first nine months of 2013 was up 11.8% from the comparable prior-year period.

Again, Canadian Solar has already secured 1,015 MW of geographically diversified utility-scale project pipeline, which extends visibility on revenue, profitability and cash flow of its total solution business for the next two to three years. This business accounted for 41.1% of total revenue in the third quarter. With other projects in pipeline, we expect the company to be able to build up from its current position. Currently, it has a solid backlog of 24 projects in the pipeline in Canada and has also secured its presence in the prominent solar markets of U.S., China and Japan.

Canadian Solar caters to a geographically-diverse customer base spread across key markets in Europe and the U.S., as well as emerging market opportunities in South Korea, Chile and Canada. The Asia-Pacific countries of Japan, China and India are expected to be the principal demand drivers of solar modules in the coming years. Specifically, the demand for solar modules in Japan will continue to drive the fortunes of Canadian Solar. Recently, it has managed to borrow $40 million from the Chinese structured finance fund Harvest North Star Capital to build 145.1 megawatts of power plants in Japan.

The company also hopes to benefit from a recovering solar industry in Europe in 2014, chiefly driven by Germany, the U.K., Italy and France. The gradual normalization of the supply-demand imbalance in the solar PV market will stabilize Canadian Solar’s average selling price.

Canadian Solar is a low-cost vertically-integrated solar module producer with predominantly China-based manufacturing assets.

Other Stocks to Consider

Given the positive fundamentals in the solar market, stocks worth considering in the space include Enphase Energy, Inc. (ENPH - Snapshot Report), First Solar, Inc.  (FSLR - Analyst Report) and JinkoSolar Holding Co., Ltd. (JKS - Snapshot Report). All these presently carry a Zacks Rank #2 (Buy).

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