Pat McKeough responds to many requests from members of his Inner Circle. Every week, his comments on the most intriguing questions of the past week go out to all Inner Circle members. Each week, we offer you a highlight from these Q&A sessions. This week, he looks at a Canadian solar stock that is growing fast but depends on continuing support from governments. For a recent article on two of our buys in renewable energy, click here.

Q: Pat: Please provide your current advice on Canadian Solar. Thanks.

A: Canadian Solar Inc., (symbol CSIQ on Nasdaq; www.canadiansolar.com) is an Ontario-based designer, maker and seller of solar modules, which convert sunlight into electricity. Its products are used in a range of residential, commercial and industrial power-generation systems.

The company makes solar modules at plants in China, as well as two facilities in Ontario.

To cut its reliance on solar modules, Canadian Solar has moved into designing and building solar power plants. It then resells these facilities to utilities, such as TransCanada Corp., or operates them itself under long-term power-purchase contracts. In 2014, this business supplied 45% of Canadian Solar’s revenue.

In the three months ended March 31, 2015, the company’s revenue jumped 84.6%, to $860.9 million from $466.3 million a year earlier. Module shipments totalled 1.23 gigawatts, up sharply from 500 megawatts (one gigawatt is equal to 1,000 megawatts). The higher volumes—resulting from strong demand in Japan, China, Europe and Latin America—helped offset a drop in module prices. The company also completed sales of three solar plants in Canada and connected four new plants to the U.K.’s power grid.

Thanks to the higher revenue, earnings soared to $61.3 million, or $1.04 a share, from $3.8 million, or $0.07. Canadian Solar spends less than 1% of its revenue on research.

As of March 31, 2015, the company’s long-term debt was $275.9 million, or a moderate 15% of its market cap. It also held cash of $407.0 million, or $7.38 a share.

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Canadian solar stock: Low prices for oil, gas and coal make solar power less cost-competitive

Canadian Solar recently completed its $265-million purchase of San Francisco-based solar-plant developer Recurrent Energy. This deal increased its project pipeline to 8.5 gigawatts (as of March 31, 2015) from 4.5 gigawatts. That total includes 2.4 gigawatts of late-stage projects, including seven facilities in Texas and California Recurrent expects to finish by the end of 2016.

Shares of Canadian Solar have shot up from just $3.80 at the start of 2013 on the company’s success at winning plant-construction contracts.

In addition, Canadian Solar plans to transfer its solar-plant operations to a separate income trust-like entity that it calls YieldCo. It will then sell units of this business to the public. Canadian Solar will likely keep a majority of YieldCo’s units, at least initially.

Many of the company’s plants sell power under long-term, fixed-rate supply contracts that will give YieldCo predictable cash flows it can distribute to investors. Canadian Solar will probably complete the plan in late 2015 or early 2016.

The company will likely earn $2.96 a share in 2015. The stock trades at 11.2 times that forecast.

One key drawback to investment in the company is that solar power is heavily dependent on government subsidies. Many of these subsidies seem likely to continue, at least for now, in China, Japan and the U.S. That’s fuelling demand from utilities for large-scale solar plants. However, subsidies are losing support in many countries. Meanwhile, low prices for oil, natural gas and coal make solar power less cost-competitive.

The Chinese government is also limiting construction of solar-panel plants in the country, which is helping reduce the solar panel oversupply that has beset the industry in recent years.

Inner Circle recommendation: HOLD for aggressive investors only.