While the broader markets are trading near all-time highs, clean energy stocks are trailing by a wide margin. Over the last three years, interest rate hikes, inflation, and a challenging macro environment have resulted in sluggish earnings growth for renewable energy stocks such as Brookfield Renewable (TSX:BIP.UN) and Canadian Solar (NASDAQ:CSIQ). While shares of Brookfield Renewable are down 51% from all-time highs, CSIQ stock is down 84%, allowing you to buy the dip and benefit from outsized gains when market sentiment improves. So, let’s see which clean energy stock is a better buy right now.
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Is Canadian Solar stock undervalued?
Founded in 2001, Canadian Solar is valued at a market cap of US$642 million. Canadian Solar has two primary business segments that include the following:
- CSI Solar: It manufactures and sells solar components, modules, and battery storage systems while providing installation services.
- Global Energy: It focuses on developing and operating solar power plants, selling electricity, and providing maintenance services.
Canadian Solar serves various customers, including distributors, integrators, and developers, under its own brand and as an OEM (original equipment manufacturer).
In the last 12 months, Canadian Solar has reported revenue of US$6.2 billion, down almost 22% year over year. Moreover, its gross margins have narrowed to 16.4% in the last year, down from 23% in 2019.
In addition to its falling profit margins, investors are worried about Canadian Solar’s rising debt balance. It ended the third quarter (Q3) with US$2.63 billion in long-term debt, up from US$400 million in 2018.
Canadian Solar has to generate enough cash to service its debt payments, sustain its operations, and reinvest in capital expenditures. Analysts tracking the clean energy stock expect adjusted earnings to rise to US$0.69 per share in 2025, compared to a loss of US$0.26 per share in 2024.
Priced at 14.7 times forward earnings, Canadian Solar is relatively cheap and trades at a 50% discount to consensus price targets.
Is Brookfield Renewable stock a good buy?
Despite a sluggish macro environment in 2024, Brookfield Renewable reported record funds from operations of US$1.83 per share, up 10% year over year. Last year, it developed 7,000 megawatts of renewable energy capacity and deployed over US$12 billion in capital investments.
Notably, Brookfield secured a landmark renewable energy agreement with Microsoft and generated US$2.8 billion via asset sales over the last four quarters. Brookfield’s chief executive officer, Connor Teskey, highlighted the positive outlook for clean power driven by rising corporate demand tied to the expansion of data centres.
Brookfield Renewable has set ambitious growth targets, aiming to achieve a development run rate of 10,000 megawatts per annum by 2027. It has maintained a robust development pipeline of 200,000 megawatts and ended Q3 with US$4.3 billion in total liquidity.
In 2024, Brookfield paid shareholders an annual dividend of US$1.492 per unit, indicating a payout ratio of 81.5%. The company has now raised dividends for 14 consecutive years at a compounded annual growth rate of over 5%.
Given its dividend payout, Brookfield Renewable offers investors a forward yield of almost 7%. Priced at 11.5 times trailing earnings, the TSX dividend stock is quite cheap, given its steady growth rates and widening dividend yield.
Brookfield Renewable remains well-positioned in the market with its diverse portfolio, strong operational capabilities, and robust development pipeline. The TSX stock also trades at a 40% discount to consensus price target estimates.
