Profiting from Panic-Selling in Trina

In this era where the masses only look at what Briefing.com tells them and/or never actually open up an earnings report to look inside but only react to the "headline" number, Trina Solar (TSL) is giving back Thursday's gains on what I consider to be a stellar report. The stock is back down to the $46 level, so I'll be adding to my position when the market opens as I consider this a gift based on what I saw. I'll explain the reality behind the numbers below.

As anyone in the market for more than a few months knows, earnings are all about "expectations" - Trina Solar reported $0.51 EPS which beat the analysts expectations of $0.48. Considering the small P/E ratio, this normally would be good enough, but considering it's "solar" and people want to game earnings, people were hoping for a larger beat - my estimate was they would actually do something in the $0.60 to $0.65 range. Which they did achieve. Huh? You just said they did $0.51.... how did they reach the $0.60-$0.65 range?

Well essentially the management of Trina Solar, as they are apt to do, pulled a surprise on us (in the past they decided to surprise us with adventures such as starting a new polysilicon plant out of the blue, without any heads up), but this time around they decided to change their currency from Chinese Renminbi to US Dollars. Strange. I have no idea why and there was no heads up for this. Here is their explanation:

• Effective January 1, 2008, the Company changed the functional currency of its operating subsidiary, Changzhou Trina Solar Energy Co., Ltd. (''Trina China''), from RMB to US dollars. This change is in accordance with FASB Statement No. 52, "Foreign Currency Translation", and was based on Trina China's significant and sustained shift in conducting a majority of its business activities in US dollars. During the first quarter of 2008, the Company recorded an exchange loss of $4.0 million, which was primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. Such remeasurements are and will continue to be, to the extent we continue to have such non-US denominated obligations, recorded as transaction gains or losses in the consolidated statement of operations.

So the net effect of said "decision" was a $4.0M loss this quarter due to this currency change. This is obviously not part of their operational business but more of an accounting function that won't be repeating in future quarters. So if we took away this "decision" their net income would of been $16.9M. With this adjustment their net income was $12.9M - essentially they lost 24% of their profit this quarter due to this exchange. But again, this has nothing to do with their core business.

So what would their EPS of been if they had $0 gain/loss from foreign currency? $16.9M / 25.1M shares = $0.67 EPS

And we would of woken up today to a stock probably trading in the upper $50s as Trina Solar beat earnings expectations of $0.48 by 19 cents. But so it goes, and again - the "masses" will just react to the headline number, which incredibly even with losing $4M in profit due to the currency change STILL beat expectations. That's how strong business is.

Just for reference the 3 main competitors who are most like Trina are Suntech Power (STP), Yingli Green Energy (YGE), and Solarfun Power (SOLF). In the last quarter how did they benefit/gain from foreign currency exchange?

1. Suntech Power gained $2.9M due to foreign currency exchange (they earned 33 cents per share, which means 2 of the 33 cents had nothing to do with their business, only foreign currency exchange)
2. Yingli Green Energy gained $9.8M due to foreign currency exchange (they earned 25 cents per share, which means 7 of the 25 cents had nothing to do with their business, only foreign currency exchange)
3. Solarfun Power gained $2.8M due to foreign currency exchange (they earned 31.5 cents per share, which means 5.5 of the 31.5 cents had nothing to do with their business, only foreign currency exchange)

So here is the irony in it all - all 3 of their most similar competitors created "earnings" (anywhere from 2 to 7 cents) from the foreign currency exchange... not only did Trina Solar not get that "cheat" to help goose their earnings, they gave away 16 cents worth of earnings due to this decision. It is almost bemusing in a way.

But again, NONE of these companies should benefit (or lose) from the currency exchange in reality - but just like most US multinationals are "beating estimates" by having a weak dollar and hence they get these currency benefits (which would reverse if the dollar ever rallied for more than a few days), these companies have been able to goose their earnings the same way. Most investors again, do not look past the headline number or dig in and see this - they just go off what Reuters or Briefing.com tells them.

So in summary what I am saying is if Trina Solar had not seen any benefits like their 3 main peers and simply gained NOTHING from currency exchange they would of reported 67 cents and beat the estimate by 19 cents. If they had gained 2-7 cents more from foreign currency exchange (like their closest peers) they would of reported anywhere from 69 cents to 74 cents. My goal was 60 to 65 cents (analysts 48). So while the masses believe this was a small beat, the reality is this was a tremendous beat. So we'll buy more on the panic selling.

Back to Trina Solar earnings - gross margins continue to be best in class, repeating the trick from last quarter [Mar 4: Long Suffering Trina Solar Finally Gets Some Relief] coming in at 25.8%, above my expectations and above Trina's own guidance.

And here is guidance which is also upped from last quarter

• For the second quarter of 2008, the Company expects to ship between 43 MW and 45 MW of PV modules and has expectations of total net revenues in the range of $169 million to $177 million. The Company believes gross margin for the second quarter will likely be between 23% and 25% and estimates operating margin to range between 13.5% to 15.5% of total net revenues.

• 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.

For future margin guidance keep in mind they said 23-25% for this quarter and came in at 25.8%. So they are playing the Wall Street game - under promise, over deliver (Apple is a master of this). All in all, a great report - which the lemmings on The Street in their short sightedness will miss. Due to this currency exchange situation,I am unclear if my $4.00 target for EPS for 2008 will still be hit, since I was incorporating 60 cents this quarter as part of my model but it should be (minimum) $3.80s-$3.90s for the year. But they did up revenue guidance for the year so $4+ should still be do-able.

That said, I am getting tired of management constantly pulling these surprises out of their back pocket, which is leading to an industry leading LOW P/E ratio since you never know what they are going to pull next. Thankfully their operations are so strong it is counteracting the management "surprises".

I'll be adding on the weak open.

EDIT Friday 9:45 AM - I've moved Trina Solar from a 7% weight to 11% weight. This is a $70 stock masquerading as a $46 dollar stock.

Disclosure: Long Trina Solar in fund and personal account

Comments

[buystocks:]

Jack, you also mention about the $5 earning before. But I don't think that would happen.

2008 Jun 09 04:29 PM

[Jack Yetiv:]

Buystocks,

On what basis do you believe TSL won't make $5 in 2009? I would love to hear you tell me how you have arrived at a different estimate for 2009.

By the way, what is your estimate for 2008--and how did you arrive at that one?

Jack

2008 Jun 09 09:25 PM

[Jack Yetiv:]

Actually, TraderMark, if TSL makes the $3.90 I project in 2008, it will have increased its earnings 150% (not just 100%) from 2007 to 2008.

I'll keep buying more if it goes below $40 again.

I don't think you made a "wrong call." I think the folks who sold TSL when it was down to $39 today are the ones that made the wrong call. And whoever was on the buy side of that trade will be handsomely rewarded on that purchase.

Jack

2008 Jun 09 09:29 PM

[larsson:]

Jack, how do you arraive at EPS 5 $ 2009 ? TSL can do this 2008 and can make 8-11 $ 2009. I can't understand you 50% to low estimate for 2009!

2008 Jun 10 01:18 AM

[Dr. Duru:]

This from briefing.com. NOW I understand better why TSL sold off...assuming a lot of folks share this skeptical view:

"Trina Solar: Polysilicon shortage is even affecting prices for recycled
polysilicon - FBR (45.00)

Friedman Billings says that despite strong 1Q08 results, TSL's guidance
illustrates that the polysilicon shortage is even affecting prices for
recycled polysilicon. Even though Trina's reported 1Q gross margin came in
above guidance, guidance clearly illustrates that prior margin assumptions are
at significant risk. Also, with firm's expectations that prices will start to
decline by at least 15% in CY09, they do not expect polysilicon prices to
decline at a significantly higher rate than the ASP decline. Another source of
concern is the cash burn rate. Even after canceling the $1 bln project to
build its own polysilicon manufacturing capacity, the co is still expected to
burn cash during the next few years. "

2008 Jun 10 08:30 AM

[Jack Yetiv:]

Dr. Duru, what you quoted is factually INCORRECT as reported. TSL explicitly stated on the call that poly cost will decrease FASTER going forward than ASP's. TSL also re-affirmed operating margings at 15-17%, which is BETTER than last year's 13-15%.

The cash burn is a greater concern vis-a-vis dilution, but they can still borrow $100 million on their credit facility (as I recall), plus with Q2 almost over, they should be making about $30 million in cash (ie, profits plus depreciation put back in) from operations this quarter. Although I do not believe their cash burn will stop completely this quarter, an extra $30 million in cash will slow it down significantly.

Having said this, I still think there is a fair chance (50:50) they will do a secondary offering that will be dilutive in order to grow their capacity to 350 MW at year's end. But in my view, it is not a foregone conclusion.

Jack

2008 Jun 10 10:12 AM

[Jack Yetiv:]

To Larson, I have done detailed calcs on my articles for 2008 EPS.

Please show me your calcs.

Jack

2008 Jun 10 10:12 AM

[TraderMark:]

Duru,

other than the cash burn rate every concern FBR raised could be applied (sometimes 10 fold) to others in the space. It is not like polysilicon is a Trina Solar issue - I find it amusing how "concerned" everyone is that TSL might not be able to maintain margins of 25.8% when each and everyone of their peers would sacrifice their left leg for those margins.

So I guess the FBR case is these margin issues will only hit Trina and the rest of the sector will sing along merrily. Ironically their integrated models and least exposure to spot pricing should shield them more from any polysilicon price impacts.

Further, I think we've been seeing spot poly drop of late (I've been reading closer to $400 on spot from some spikes in Q1 to $500ish) so why all this hand wringing is beyond me. Especially since the way it is being couched is as if Trina will get hit by this but the rest of those fine companies are just fine.

Talk about cash flow - yes, I can understand that as a concern, but the rest of it (recycled or not) is misleading in terms of the "outsized" impact to Trina Solar - its an industry issue and many would argue Trina is among (if not THE) most insulated. But we can't let facts get in the way of a good analyst report.

Bottom line - if you rely on analysts over the long run, you will lose money.

2008 Jun 10 10:54 AM

[larsson:]

To Jack,

Check out investinghobo on the yahoo board, I don't need to add anything further to his estimation of 5$+ for 2008 and 10$+ for 2009.

2008 Jun 10 01:24 PM

[geniuspup:]

don't get in early

patience when buying this stock

2008 Jun 10 01:38 PM

[buystocks:]

My estimate is with $2.04 to $2.5 range the max for this year. I won't take their guidance that serious. Small Cap always promise a lot and do so little.

2008 Jun 10 02:16 PM

[buystocks:]

Fortunately I sold, today it drop even more. Since their technology is
so simple that everyone can do, plus the thin film will kill this stock sooner or later. I am not shorting it and long with it... just too risky to play.

2008 Jun 10 02:18 PM

[Jack Yetiv:]

To Larson,

There are a million threads on the Yahoo board, didn't find it and simply don't have time to dig for it--if investinghobo's information is that good, please copy and paste it here.

Completely agree with Trader Mark--in addition, in Q1, TSL paid $234/kilo for poly, far less than spot. In addition, they have boughtr a lot of poly for 2009--and they tell us to expect poly prices to be 15% LESS in 2009.

The articles you cite which speak of HIGHER poly prices are simply MISinformed.

I have posted my calcs for earnings in 2008 which read almost $4/share, more than double 2007, and NOBODY has done different calcs to disagree with mine.

Jack

Jack

2008 Jun 10 03:23 PM

[buystocks:]

" and NOBODY has done different calcs to disagree with mine."

What do you mean? my calculation is only $2.04 for the whole year, which is much more realistic. you hold a huge share, of course you will dream of $4. I am afraid that will mistaken by other readers by your postings a few times a week. I am not shorting it, but I am also not buying it, It will mostly drop to $28... look and see.

2008 Jun 10 04:29 PM

[Rainheavy2002:]

Where is your calculation? Please show me. Only a retard can claim a full year estimate by multiplying one quarter estimate by four.

2008 Jun 11 01:24 AM

[buystocks:]

Rainheavy200, You might be the "retard" one if you use your own imagination to dream an earning which you feel good.

2008 Jun 11 01:48 AM

[buystocks:]

I am not shorting it or long with it. so my opinion is from what I think of. I just don't want people to get into the mess. Obviously to me that you are holding the TSL shares.

2008 Jun 11 01:49 AM

[buystocks:]

Plus TSL is not the first day in business, what made you think they will earn that much more than the first quarter? From your estimate, TSL needs to earn $1.1 each quarter from now on to make up the total $3.8 this the year(Which Jack said $3.9). do you think that's possible to jump from $0.51 this quarter to $1.1 next quarter ?

Seems like you are the one with no brain, and sounds like a elementary school student to me. I expect this stock will fall back to around $28. Also TSL do very little R&D, the technologies won't improve itself. I have listen and research on this company for a few months.

2008 Jun 11 01:57 AM

[Love to short:]

Trader Mark,

Let me start off by saying that the vast majority of your articles are great with solid reasoning and analysis. And I agree with you that TSL has great long term prospects and is one of the cheapest stocks in the solar space. And again, you are right in saying that 90% of investors only pay attention to the headline number when it comes to earnings. However, based on that notion, investors should position themselves in a manner that takes that into account. If a trader knows that everyone will be looking only at the headline number, then holding a stock through the annoucenement means that the trader believes the overall market will react favorably to the annoucement. That said, although TSL beat estimates, the expecations were extremely high for the report. This is exemplified by the solid rally the stock saw leading up to the annoucement. Further, the whisper number was actually much higher than the consensus estmates, making for lofty expectations. So sure, the figures based on the company's operations were strong, but the currency loss must be factored in given that expectations were so high. So although the headline number did not give a fully accurate depiction of the company's performance, when expecations are so high, there only needs to be one little negative factor that can create the market to sell the stock. So the better trade would have been to sell the stock into the rally, get some more clarity on the company from the report, and then re-enter with a position. That is not applicable to all stocks, but just the ones that have such lofty expectations.

That said, TSL down below 37 is now VERY attractive, so I will be taking a position in myself. Best of luck with the fund.

2008 Jun 11 08:29 AM

[TraderMark:]

Love to short,

Generally I cut back into earnings. But I felt Trina would have a very good chance to not only beat, but smash earnings. Which they would of (67 cents vs 48 cents) if not for the currency adjustment. No one on the planet except Trina management knew about that adjustment. So I cannot predict things like that.

I also dont think expectations were sky high; the amount of attention Trina Solar gets versus First Solar or LDK Solar is about 1/100th. Expectations were not that high.

Anyhow its water under the bridge and it is what it is... it is impossible for someone not in the management team to guess they would of done what they would of done. Everyone was blindsided. I honestly though they'd get a few cents currency BENEFIT since all their peers got one. Not only did they not get a benefit, they lost a whole lot of money from this adventure. My guestimate was they would do 60-65 cents versus analysts 48... this would of easily of led them to a path of $4 EPS. So to say a company traded at about 12x forward EPS has "sky high expectations" is taking it a bit over the top. TSL is probably the most ignored co in the space.

2008 Jun 11 10:28 AM