Why I'm Not Cutting Back Trina Solar before Earnings

Our current #1 position reports Friday morning. Usually my methodology is to cut back on all positions ahead of earnings, but due to the severe undervaluation in this name, I am keeping my entire stake going into the cattle call. I'm not sure if this quarter will be "the one" or it will happen next quarter, but the current $3.14 EPS 2008 analyst estimate I find to be completely beatable, in fact by a large margin. I am hoping guidance tomorrow better reflects that. But even at the "$3.14" we have a forward P/E ratio of under 15 for a company growing well over 100% this year, and should be able to grow >50% for the next few years. At $4.00 or so, I believe it can achieve this year in EPS its trading under 12.

Most peers trade at forward P/E ratio in the mid to upper 20s. So if you throw my $4.00 2008 estimate and give it a peer valuation, you see where I am going with this one... and why I am not cutting back, although we just never know how the lemmings will react. Frankly I could make a very valid argument that Trina (TSL) should be valued higher than some of its peer group due to its integrated business model and potentially superior gross margins. The only fly in the ointment would be any sort of equity offering, as almost every company in the sector has done in their short public life - Trina Solar has yet to do one, so they are overdue. But their cash flow is such that they might not need to do one at all.

Either way, with such an overweight on one position, our performance for the week will definitely be determined by tomorrow's action in Trina.

Disclosure: Long Trina Solar in fund and personal account

Comments

[Abe Mishima]

Even if TSL beats the whisper number by a nickel, the stock could still fall. One could argue this on technical grounds, such as Max Pain = $40 or the share price being at the top of its channel. But I won't use those herrings. I worry about the technology that TSL brings to the table. Nothing to distinguish it from half a dozen other companies. Then what makes this company so valuable in the eyes of investors? Low cost! How long will it be able to maintain this advantage is the $64 question. Maybe they are lucky in terms of management or workers. However, do they have the capital to compete with STP (the king of Chinese solar companies) or LDK (the bulldog)? Can't say.

[larsson]

Great article Mark! Don't forget Trina can do more than 5 EPS in 2008 and double it in 2009. So we are at fP/E 10 2008 and fP/E 5 for 2009. Peers are 250-300% higher valued. Nothing more to add.

[larsson]

Ade, TSL is "the King" because due to its highest margines compared to all others (incl. STP & LDK) it is the safest solar play. STP has not any kind of vertical integration, so again TSL is the advanced company.

[buystocks]

Even TSL beat the number by one cent, It is still undervaluted stock.

[buystocks]

Just one question, I know Canadian solar is making the UMG products. Will the UMG compete with thim film? also what are the applications of the regular SI solar module and thin film modules? on my research, the thin film modules are only for commercial building markets now due to the limited conversion efficiency, and the SI solar modules are using with both residential rooftops and commercials... correct me if I am wrong.

[larsson]

As Si will reach historical prices soon again, there is no need for UMG or thin Film. Si is unlimited available in the world and no shortages will occur in future.

[Van Gastel]

I have a large position from 44 USd a couple of days ago. The action over the last few days tells me that we're ready to jump into hyperspace today.

BUT I also think it will be the last leg for most of the other solars before they head back to the caves into hibernation for the next earnings season. All the news is out now.

BR

[Iconoclast421]

I would sell at 49 in a heartbeat. The sector just doesnt have the kind of technicals that give me confidence. Every single chart is ugly, even SOL and ENER. Holding is a pure gamble, and I dont see the need to gamble.

[maxbid]

"For the full year of 2008 the Company expects total net revenues to be in the range of $770 million to $808 million, with PV module shipments between 200 MW to 210 MW. The Company is expecting gross margin for the year between 23% and 25% and believes operating margin will likely be in the range of 15% to 17% of total net revenues."

Looks like your number of $4.00 eps for 2008 is about double what the actual number will end up being.

And, TSL margins for all of 2008 are forecast to be less than LDK's.

Now what do you think of TSL?

Now that all the solars have reported, I would like to see someone make a table of all of them to compare:
projected 2008 eps, revenue, megawatts expected to be shipped, and gross margins. Wouldn't that be nice.

[maxbid]

Here's the quote from the LDK Q1 report:
"For the full year of fiscal 2008, LDK Solar currently estimates:

-- Revenue to be in the range of $1.08 billion to $1.18 billion; -- Wafer shipments in the range of 560 MW to 580 MW; -- Gross margin in the range of 23% to 28%; and -- Annualized wafer production capacity to be 1.1 GW by the end of 2008 and 2.0 GW by the end of 2009."

[steve pluvia]

WHY c-Si CO's ARE SETTING UP AS SHORT PLAYS

Low cost product from thin film AMAT plants is getting pre-sold. This means 2-4Q's before 1.5gw of lo-cost thin film hits the market -- it has already disrupted sales price of c-Si by driving sales price DOWN. That is happening right NOW. That means lower ASP's for c-Si = low to zero margins for all c-Si companies going forward, until poly prices drop substantially.

That's why c-SI including TSL this am is getting hit. Smart money is rotating out of c-Si into thin film PV. Here's the beef:

Production cost/watt & efficiency:

~ AMAT Thin Film $1.10-1.25/watt 9.5-11% efficiency [AMAT not pure play]
~ CIGS Thin Film $ .70-.90/Watt 10-14% efficiency [only public play ASTI; private plays = Nanosolar, Global Solar, Miasole, Heliovolt]
~ ENER triple junction a-Si $2.10/watt 8.5-10% efficiency [ENER only play]
~ C-Si 2.10-$2.30/watt 16-22% efficiency [STP, TSL, SOLF, etc, etc, etc]

AMAT plants WILL bring a minimum of 1gw of lo-cost PV to market in the next 12 months, 2.5gw [or more] the following 12 months 5gw next 12 months.... CIGS is the real winner as it will maintain better than 50% margins and sell at plant capacity for more multiple years.

DEMAND

CIGS and AMAT plant produced thin film can be sold & installed profitable at GRID PARITY [below $3.50/watt]. This is a seminal, tipping point event. Demand shifts sharply higher at grid parity prices, assuring long term growth and profitability for all companies producing $1/watt PV.

The lowest risk, highest reward play in our opinion is ASTI; They're the only public CIGS company and are producing CIGS in their pilot plant currently. They target commercial production by next year; everyone should own some ASTI, adding more if they meet the Q milestones identified in their prospectus.

Huge opportunities remain in solar -- just make sure the company you own can produce at $1/watt or less n the next 12 months or you'll be in for a nasty surprise.

Good luck

Steve Pluvia

[steve pluvia]

I almost for got to mention FSLR -- although they're currently limited by production capacity, they produce product with similar costs and efficiency to the new AMAT plants -- approx 10% efficiency, at a cost of $1-$1.15 /watt going forward.

From our investment perspective the upside reward in FSLR is not worth the downside risk; buying mfgrs of lo cost thin film before the facts in my post above are understood by the street [and thereafter prices explode] is in our opinion, the best play.

Good luck

Steve Pluvia

[buystocks]

Steve Pluvia, do you think thin film can be use on residential roofing? Why Daystar CEO is saying their thin film on glass only good on commercial buildings?

[steve pluvia]

The residential roofing market is higher cost/watt to install and prone to problems [panels need periodic washing -- require easy access].

Smart money is in flat commercial roofing and free-field installs large PV farms located within metro areas [no long transmission].

Steve Pluvia

[gebby]

is CTDC a good chinese thin film play. they expect to be in commercial production with in six months. also i dont see TSL growth as rapid as growth for LDK or STP. in the meantime industry experts continue to recommend nuclear and wind. no mention of solar. industry seems to be biased against solar( including wall street banks)????? any thoughts?

[Iconoclast421]

Thin film is not for residential because thin film uses twice the space. Remember, only 30-50% of a typical roof actually faces the sun. So 10% efficiency on half a roof is really cutting it close, to the point of being obtrusive. This is why there is no real market for thin film residential. As for commercial, concentrating solar thermal is a more cost effective and scalable source of power.

When the costs of 20% efficient panels come down, all those goofballs who used up all their precious roof space with meager 10% panels... they are going to feel like asses. Cost per watt matters, yes, but if you want to maximize the amount of power you get off your roof, and the costs are somewhat in the same ballpark, then companies are going to go with the higher efficiency polysilicon.

Thin film has been propaganda for years, if not decades, designed to keep the industry down. (No doubt thin film, nano-solar, and all that high tech sounding jargon started off as an oil company plot. lol.) One day there will be something that beats polysilicon. But that day is not today, and will not be any day this decade.

[Iconoclast421]

Dont get me wrong though, I agree ASTI is a buy at the moment, but for purely technical reasons! The logical battle between thin film and polysilicon has nothing to do with the battle thats going on in the market. And right now ASTI is clobbering TSL.

[zawy]

Steve, what is the lifespan of c-Si compared to AMAT, CdTe, and CIGS? If it's nearly double, then the nearly double cost/watt for c-Si comes out to be the same cost/kwh. $/kwh is what matters, not $/Wp. Then there's installation costs which are 1/2 as much for c-Si since it has nearly double the efficiency. Now consider that c-Si is more applicable for home installation for these reasons, which means there's not going to be a 40% loss in transmission since we're saying thin-film is mainly for the grid. Now consider the c-Si are currently growing faster than FSLR and that FSLR will not reduce its costs as much as c-Si in the next few years if price of Si goes down.

[steve pluvia]

Iconoclast:

"One day there will be something that beats polysilicon. But that day is not today, and will not be any day this decade."

Umm yea. Unadulterated rookie BS.

AMAT is the world leader in semiconductor tools and has been for more than a decade. Semiconductors and flat panels produced from AMAT tools are in literally every modern home in the USA.

When AMAT said they were producing an automated production line for thin film PV -- smart money grabbed a triple vente latte and woke the eff up. When AMAT proved they could build a plant in 7 months and ramp equipment in 3 months smart money began rotating out of c-Si and into thin film.

When AMAT achieved the milestone noted in the last paragraph they changed the PV industry forever. There is no longer a technology barrier to entering lo cost thin film PV; Anyone can plunk down the cash and start spitting out PV that can be sold with a 50% margin and installed at grid parity prices. Install at grid parity prices = unlimited growth.

This grid parity PV competes with coal power plants, not c-Si. Arguing differences between c-Si and thin film pv is a waste of breath. As the saying goes: "Its about costs stupid".

Thin film PV has big profit margins and unlimited growth because it can be installed at grid parity prices with phat margins. c-Si cannot be installed at grid parity prices without giant subsidies, and even then margins are slim to nil. Even with a 80% drop in poly, c-SI cannot cost compete with CIGS thin film, which is why we're insanely bullish over CIGS thin film.

Smart money gets this. Joe six pack does not and will buy the c-Si stock smart money shorts.

Good luck

Steve Pluvia

[steve pluvia]

"Steve, what is the lifespan of c-Si compared to AMAT, CdTe, and CIGS?"

They are all engineered for 20-25yr lifetimes. Nobody knows exactly how long they'll last because they haven't been around that long. That said, there are some advantages between the technologies:

1. CIGS increases efficiency with initial sun exposure while light induced degradation results in decreasing efficiency of a-Si by 15-20%; c-Si by avg .071%/yr.

2. CIGS outperforms all other technology in low light conditions and hi temp summer conditions.

[buystocks]

Steve Pluvia, However Thim film can't be used on residential rooftops, which is a huge market. Do you think C-SI will have all the residential market? And currently how popular for someone to put solar PV on their roofs?

[buystocks]

Another question, Why flexible thin film is better than the one on glass? what are the advantages?

[zawy]

If c-Si degrades only 0.07% per year, then a good design could last as long as the electrical joints and glass cover hold up. 40 years would be only 3% below say 18% initial (assuming your 0.07% is in terms of absolute eff and not as a percentage of eff). Your a-Si is apparently percentage of the eff and not absolute eff.

So this strengthens my and another posters point that you didn't address: it seems clear that CIGS can never beat c-Si for residential installs, and that c-Si residential is currently roughly cost-competitive with FSLR and CIGS when taking lifespan and install costs into account. One thing to remember about residential is that estimates for those install costs are something like 30% for batteries that aren't necessary and not included utility install costs.

Using EEstor capacitors with today's c-Si and an EV is cheaper than using a gasoline combustion engine. At $5/Wp installed and 40 years, it's $0.057/kWh. With a 7% loan and mortgage interest tax deduction, that comes to $0.13/kWh and you don't have to worry about inflation in your electrical bill for things like carbon credits. If EEstor capacitors are sold this year as they claim, energy storage for overnight won't cost much more.

[VP ofCommon Sense]

I think the technical discussion is great, but mostly rehashing of old news.

Here's my thesis:

I think we can all agree that poli prices are going down. Maybe they don't reach parity with thin film, but within 20% is close enough due to installation costs. Once that occurs in about two years we'll be splitting hairs about which technology better.

At that point it will simply come down to regular stock analysis, and that's why the TSL's and CSIQ's of the market with their relatively low P/E's look good to me.

ASTI seems interesting, but their production line (which isn't running) is very small at 1.5MW (unless they mean 1.5MW per day, which if they do, someone please tell me!).

Finally, I believe stock investing is primarily forward looking. Since I think that thin film's cost advantage will be greater today than at any day in the future, the opportunity for big gains from investing in thin film has passed.

[steve pluvia]

BUYSTOCKS:

"Steve Pluvia, However Thin film can't be used on residential rooftops, which is a huge market."

1. Residential PV is a tiny market compared to commercial rooftop and free-field installations;

2. We design 10-15kw 10% thin film PV systems for residential homes [larger, hi-end flat roof contemporary homes], so to say you can't use thin film on residential is just plain wrong.

"Its about costs stupid" Nobody puts a $55,000 c-Si system on a house [or anywhere else] when you get the same energy from $35,000 thin film system. If you have to pay $55k, [because the available footprint is too small for thin film] you just don't put it on your house.

[steve pluvia]

VP of Nonsense:

"Since I think that thin film's cost advantage will be greater today than at any day in the future, the opportunity for big gains from investing in thin film has passed."

Udderly ridiculous statement. "cost advantage" is not the issue, it's growth and margins. CIGS has the highest profit margin potential and unlimited growth because they will be selling product that can be installed at grid parity prices.

c-Si is looking at margins shrinking to zero from now until at least '10; That means PE's growing due to shrinking profits, or earnings turning to losses -- and thus no PE. During that time thin film companies will be expanding using profits.

As to this info being know by the street and baked in the cake -- baloney. AMAT was not considered a threat capable of driving PV price down until Signet Solar announced they completed their AMAT plant [pr dated May 23]. Even then, few understood the significance of this event. Most thought like you, c-Si could survive until poly prices drop with growing sales and margins in the 20's.

Smart money now knows c-Si margins will go to zero in the next 12 months and they fled the c-Si sector like rats abandoning ship.

[VP ofCommon Sense]

Steve,

You were pumping FSLR a month ago at $300/share. Lay off the insults.

[steve pluvia]

"You were pumping FSLR a month ago at $300/share. Lay off the insults."

VP of Nonsense,

I never "pumped" FSLR, I just corrected fact-errors made by ridiculous shorts. As I said then, I have never been long FSLR, and I doubt I will ever be in the future.

[buystocks]

Steve Pluvia,

What do you think the future of the CPV? Looks like they can compete with Thin film on cost and and profit margin, and eventually replace c-SI and thin film. Am I right?