Trina Solar Takes Aim At First Solar

This past earnings season for solar companies was a general disappointment if measured by stock performance after the earnings releases although the season started with a bang when Sunpower (SPWRA) issued surprise guidance and generated a one-day, 29% pop in price. I wanted to review the conference calls of all the major, publicly traded solar companies, but, alas, such a goal was overly ambitious (click here for my review of First Solar’s earnings report). I picked Trina Solar (TSL) as my focus because of its stellar stock performance from the March lows and its ability to regain important price levels from 2008. The chart below (from mid-day today) shows how in July TSL made fresh highs for the year that matched an important consolidation point for 2008. After swooning through earnings and a secondary offering, TSL is now challenging those highs once again.

Reading through the transcript of TSL’s last conference call (August 17, 2009), you could walk away believing that all is well in the solar industry. TSL’s management talked about much stronger demand for the second half of the year over the first half, cooperative banks in the U.S. and Europe working on financing for customers, and strong pricing power due to exceptionally high product quality, a strong brand name, and aggressive cost reductions.

My eyes opened particularly wide when TSL claimed that its cost reductions would allow the company to go toe-to-toe with First Solar next year: “…going forward next year, and our cost reduction road map will allow us to be able to compete with First Solar in terms of the system — balance system level, so that margin wise we are going to compete with them sometime next year.” TSL correctly predicted that such competition will hurt FSLR because of the high margins it has enjoyed to-date. This is something I will first need to see to believe, because FSLR’s projections claim that it will remain comfortable below the costs of its poly-silicon competition even under the worst scenario for the foreseeable future.

Understandably, analysts really pressed TSL management on their aggressive guidance and optimistic outlook on their business prospects. For example, receivables have grown from 90 to 100 days. Also, TSL’s other Chinese competitors are getting more and more aggressive with their own price reductions. Finally, only 50% of TSL’s backlog of 200 megawatts includes a fixed priced agreement. (Notably, they talked about their own high amount of flexibility in renegotiating prices with their own suppliers).

On the positive side, TSL has achieved positive net operating cash flow and increased cash levels to over $200M.

TSL’s customer mix surprised me. The company currently specializes in smaller markets and perhaps this explains some of the out-performance to-date. That is, capturing mind share in small markets tends to lock out competition pretty quickly. While TSL is now looking to expand into the U.S. and China (who isn’t, right?), its largest markets remain Belgium, Italy, and Germany with equal shares across all three.

Clearly, if TSL can deliver on its big promises, it will remain a top-tier solar company. With a forward P/E of 13, Price/Sales of 1.0, and a Price/Book of 1.8, TSL has a very attractive valuation even sitting here at 2009 highs. However, I would have preferred to see more conservative guidance and projections, and I think execution risks remain very high. I am not buying the stock here, and I will wait for either lower price levels and/or to see TSL deliver in its next earnings conference call.

Be careful out there!

Full disclosure: net short FSLR, long SPWRa, long TAN