Canadian Solar cut, Enphase one of four top solar sector picks at Citi

Canadian Solar (NASDAQ:CSIQ) -6.2% in Friday's trading as Citigroup downgraded shares to Neutral from Buy with a $44 price target, trimmed by $1, and as a High Risk due to its high volatility and exposure to potential rapid changes in commodity prices.

Canadian Solar (CSIQ) "operates in a rapidly growing industry and benefits from being one of two vertically integrated players in our coverage. However, the obvious drawback of vertical integration is relatively high capital intensity," the Citi analyst team wrote.

Significant manufacturing capacity expansions - with the first phase of 14 GW in wafer/cell capacity expansion commencing in H2 2023 - should mean free cash flow will get incrementally more negative in the near to medium term, before turning positive in 2025, Citi said.

Canadian Solar's (CSIQ) manufacturing capacity expansion is taking place just as the core CSI segment could face ASP pressure from lower module prices, the bank also said.

Citi said its top Buy picks in the solar sector (TAN) are Enphase Energy (NASDAQ:ENPH), Eneti (NETI), SolarEdge Technologies (SEDG) and Shoals Technologies (SHLS); the firm's least favored names are Generac (GNRC) and SunPower (SPWR).

On Enphase (ENPH), Citi said the company is "laser focused on customer satisfaction, innovates new products consistently to stay ahead of the curve and stays disciplined with its capital allocation and operating strategy [which] position the company to benefit from [the] positive fundamental landscape for solar."

Canadian Solar (CSIQ) is a highly profitable company that will benefit from substantial tailwinds affecting the sector as a whole, Michael Wiggins de Oliveira writes in an analysis published recently on Seeking Alpha.