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Trina Solar: Canary in the Solar Mines?

Trina Solar reports stronger than expected earnings in the fourth quarter, but larger industry pressures in solar continue to weigh on Trina shares.



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Trina Solar


was out on Wednesday morning with earnings that, not surprisingly, beat Street estimates, but neither Trina Solar shares nor the solar sector were rallying on the strong earnings report, or on Trina's guidance that it would increase shipments by as much as 100% in 2010.

On Wednesday afternoon, trading in solar stocks was showing modest declines, and Trina's shares were down close to 3%, for the solar sector's biggest loss. Trina had surpassed its daily average volume of shares traded of three million shares by midday. Trina shares had lost 61 cents by midday Wednesday. Trina shares had already dropped close to $1.50 in value over the first two days of the week.

Trina Solar reported fourth quarter revenue of $313 million, beating a street consensus of $283 million. Trina also beat the street with earnings per share of 74 cents, versus a street consensus of 60 cents. Trina achieved the 74 cent gain in spite of a $6 million -- or 9 cent per share write-off -- and a $2.6 million foreign exchange loss caused by the euro, equal to 4 cents of earnings per share.

Trina also provided guidance of 2010 shipments in the range of 750 megawatts to 800 MW. In the first quarter of 2010, Trina guided to 180MW-190MW of shipments and gross margins between 26% and 28%.

The bearish turn in Trina shares after the strong Wednesday morning earnings indicates the continuing concerns about the second half of 2010, the earnings potential of Trina, and the assumptions Trina management is using in its 2010 guidance.

Gross margins, according to Trina, would fall from the fourth quarter level of 32.6% to the 26%-28% range in the first quarter of 2010. Chinese solar companies had suggested towards the end of 2009 that average sales prices would be flat in the first part of 2010. However, if the first quarter is to be a strong demand quarter and yet Trina's gross margins are falling, that could suggest a larger average sales price decline than the solar companies have stated, or that the Street has modeled.

Cowen & Co. said in a flash note on Wednesday morning that while concerns about the pending German FIT cuts may overshadow the strong solar performance in the near term, it believes Trina can adjust to the average sale price pressure in the solar industry better than most of its competitors.

That is the debatable point.

A question for solar investors is why Trina's gross margins would be declining in a sold-out market if the average sales prices are not declining more than the solar management and Street have expected.

Another big issue is Trina's flat volume guidance for the second half of 2010. Barclays Capital analyst Vishal Shah noted that the flat guidance from Trina management for shipments to Germany in the second half of the year implies a very big market share gain at a time when the German market is supposed to decline.

Adam Krop, an analyst with Ardour Capital Management, wrote in an email that the fact that Trina's overall shipments will be flat in the second half at a time when average sales prices could decline by as much as 20% indicates that earnings power will deteriorate over the second half of the year.

Krop wrote in an email, "Given ASP assumptions (including a dip in the third quarter because of the German FIT reduction), quarterly revenue for Trina Solar will likely be sequentially flat to down from 1Q10-4Q10 under this scenario. More importantly, earnings per share will likely dip in the second half of 2010, reflecting this volume scenario and ASP decline from Germany. In other words, it doesn't look like we will see an earnings per share number like we did in 4Q09 in 2010."

Trina Solar's average sale price was down 6% sequentially in the most recent quarter. Gordon Johnson, an analyst at Hapoalim Securities, estimates that Trina's average sales price will fall 12% to 13% in the first quarter 2010, based on it shipment and gross margin guidance.

The first quarter average sales price declining trend could be occurring faster than expected, and that's the last thing solar companies need with a 16% feed-in-tariff cut in Germany sure to put significant pressure on ASPs in the second half of 2010. While Trina has approximately 30% sales exposure to the German market -- less than some solar companies -- Germany is still the biggest piece of the puzzle for Trina.

What's more, solar companies have maintained that the ASP declines will be at least partially absorbed by other parts of the solar chain -- and the fight between installers and module players over who will absorb more of the sales price reductions will continue into 2010. Still, Trina's sequential decline in ASP and projected further decline in the first quarter of 2010 suggests that solar companies may not have the ability to pass along the average sales price reductions, as they have been saying they continue to have the power to do.

Other analysts are looking beyond 2010 in their bearish view of Trina, too. Earlier this week, Barclays Capital put out a report arguing that the biggest issue for solar is not the second half of 2010, but 2011. Barclays is predicting a multi-quarter period of earnings deterioration for solar stocks.

Barclays reduced its 2011 earnings per share estimate for Trina by 38 cents, from $2.14 to $1.76.

-- Reported by Eric Rosenbaum in New York.


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Copyright 2009 Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Copyright 2009 Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.