Analyzing Clean Energy Stocks: Canadian Solar vs. Brookfield Renewable

As the broader markets approach their all-time highs, the performance of clean energy stocks has not kept pace, trailing significantly behind. Over the past three years, a combination of interest rate hikes, rising inflation, and a challenging macroeconomic landscape has led to lackluster earnings growth for renewable energy companies like Brookfield Renewable (TSX:BIP.UN) and Canadian Solar (NASDAQ:CSIQ). While Brookfield Renewable’s shares are down 51% from their peak, Canadian Solar has experienced an even steeper decline of 84%. This downturn presents an opportunity for investors to capitalize on a potential rebound. Let’s explore which of these clean energy stocks holds more promise for investors today.

Is Canadian Solar Stock a Bargain?

Founded in 2001, Canadian Solar has a market cap of approximately US$642 million and operates primarily through two segments:

• CSI Solar: This segment manufactures and sells solar components, modules, and battery storage systems, while also offering installation services.
• Global Energy: Focused on the development and operation of solar power plants, this segment sells electricity and provides maintenance services.

While Canadian Solar serves a diverse client base that includes distributors and developers, its recent financial performance has raised concerns. In the past year, the company reported revenues of US$6.2 billion—a year-over-year decrease of nearly 22%. Additionally, gross margins have contracted from 23% in 2019 to just 16.4% recently.

Concerns About Rising Debt

Another factor weighing on investor sentiment is Canadian Solar’s escalating debt levels. The company ended the third quarter with long-term debt totaling US$2.63 billion, a stark increase from US$400 million just five years prior. This raises the critical question of whether it can generate adequate cash flow to service its debt, sustain operations, and invest in future growth.

Despite these challenges, analysts remain optimistic about Canadian Solar’s future, projecting adjusted earnings to reach US$0.69 per share by 2025, a significant recovery from an expected loss of US$0.26 per share in 2024. With a price-to-earnings (P/E) ratio of 14.7 times forward earnings, Canadian Solar appears undervalued, trading at a 50% discount to consensus price targets.

Brookfield Renewable: An Attractive Proposition

On the other hand, Brookfield Renewable is showcasing resilience despite the sluggish environment in 2024. The company reported record funds from operations at US$1.83 per share, marking a 10% increase year-over-year. In the past year, Brookfield added 7,000 megawatts of renewable energy capacity and invested over US$12 billion in capital projects.

Notably, Brookfield has secured significant partnerships, including a landmark renewable energy agreement with Microsoft, and generated US$2.8 billion from asset sales in the last four quarters. CEO Connor Teskey has emphasized a positive outlook for clean energy, largely driven by rising corporate demand tied to the growth of data centers.

A Promising Growth Trajectory

Brookfield Renewable is setting ambitious goals, targeting a development run rate of 10,000 megawatts per year by 2027. With a development pipeline of 200,000 megawatts and total liquidity of US$4.3 billion at the end of Q3, the company is well-equipped for future growth. In 2024, Brookfield distributed an annual dividend of US$1.492 per unit, demonstrating a payout ratio of 81.5%. Impressively, the company has raised dividends for 14 consecutive years, with a compounded annual growth rate exceeding 5%.

Conclusion: Which Clean Energy Stock is the Better Buy?

When comparing these two clean energy stocks, each has distinct advantages and challenges. Canadian Solar presents a potential bargain for risk-tolerant investors willing to navigate its declining profit margins and rising debt. Conversely, Brookfield Renewable offers a strong growth trajectory, a solid dividend yield of nearly 7%, and a proven track record in the renewable energy sector. Ultimately, the choice between these stocks will depend on individual investment strategies and risk preferences, but both stand as notable options in the evolving landscape of clean energy.