Trina Taking Aim At First Solar (TSL,FSLR)

This past earnings season for solar companies was a generaldisappointment if measured by stock performance after the earningsreleases although the season started with a bang when Sunpower (SPWRA)issued surprise guidance and generated a one-day, 29% pop in price. Iwanted to review the conference calls of all the major, publicly tradedsolar 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 stockperformance from the March lows and its ability to regain importantprice levels from 2008. The chart below (from mid-day today) shows howin July TSL made fresh highs for the year that matched an importantconsolidation point for 2008. After swooning through earnings and asecondary offering, TSL is now challenging those highs once again.

090911 TSL 300x178 Trina Taking Aim At First Solar (TSL,FSLR)

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

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

Understandably, analysts really pressed TSL management on theiraggressive guidance and optimistic outlook on their business prospects.For example, receivables have grown from 90 to 100 days. Also, TSL’sother Chinese competitors are getting more and more aggressive withtheir own price reductions. Finally, only 50% of TSL’s backlog of 200megawatts includes a fixed priced agreement. (Notably, they talkedabout their own high amount of flexibility in renegotiating prices withtheir 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 specializesin smaller markets and perhaps this explains some of theout-performance to-date. That is, capturing mind share in small marketstends to lock out competition pretty quickly. While TSL is now lookingto expand into the U.S. and China (who isn’t, right?), its largestmarkets remain Belgium, Italy, and Germany with equal shares across allthree.

Clearly, if TSL can deliver on its big promises, it will remain atop-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 evensitting here at 2009 highs. However, I would have preferred to see moreconservative guidance and projections, and I think execution risksremain very high. I am not buying the stock here, and I will wait foreither lower price levels and/or to see TSL deliver in its nextearnings conference call.

Be careful out there!

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

Image: Trina Solar Soars