Why this one solar stock has the most upside

Chris Lau, Kapitall: Solar stocks are staging a comeback after a rough couple of years. Which solar stock has the brightest future?

Solar energy plays rose and fell dramatically over the last few years after a confluence of bad news hit the sector. The end of solar subsidies, excess supply, and weakening demand all pushed solar stocks to multi-year lows last year.

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All of that changed in recent quarters. Weak firms went bankrupt, and strong ones found a way to sell solar panels profitably. Trina Solar (TSL) led the sector higher after reporting a very strong first quarter last Wednesday. The upside for solar could be just the beginning.

Trina surprises market

Trina warned markets in April that it would ship and  sell less product than consensus. At the time, the company blamed a temporary decrease in shipments to the EU as the reason for the miss. In the quarterly report, Trina not only reported a sharp increase in profitability (gross margin), the company also said shipments would grow by as much as 1010 megawatts (“MW”) in the current quarter (Q2).

Still some concerns

Trina has a healthy $577.7 million in cash, but its bank borrowings are $982.5 million. Gross margin was higher, thanks to shipments to regions that offer high average selling prices for Trina. Not all plays in the solar sector responded to Trina’s results:  First Solar (FSLR) and SunPower (SPWR) both added a few points, but the trajectory of its share price is still downward.

Upside

Trina’s valuation is very low compared to SunPower and First Solar. The latter two trade at a forward P/E of 28 and 24, respectively. Trina’s forward P/E is just 15. Still, First Solar continues to win deals. It most recently announced a collaboration with Ingenero, an Australian solar firm. The two companies will develop a hybrid diesel-solar power plant for  Rio Tinto's (RIO) Weipa bauxite mine in Australia.

SunPower has yet to really recover from the selling pressure it faced earlier in May. The firm forecast Q2 revenue and earnings would be below consensus. It expects revenue will be as high as $625 million on earnings of $0.35 per share. For the full year, SunPower projects earnings of $1.10-$1.40 per share.

Conclusion

Trina’s fundamentals improved dramatically last quarter, and investors should expect this trend to continue. Markets are not yet convinced the turnaround is in place. Another strong quarter by Trina might change the market’s mind.

Click on the interactive chart to view data over time. 

Do you think Trina Solar has the most upside potential of these solar stocks? Use this list as a starting point for your own analysis.

1. First Solar, Inc. ( FSLR): Manufactures and sells solar modules using a thin-film semiconductor technology. Market cap at $6.07B, most recent closing price at $60.67.

 

2. SunPower Corporation ( SPWR): Designs, manufactures, and delivers solar systems to residential, commercial, and utility customers. Market cap at $4.17B, most recent closing price at $31.89.

 

 

3. Trina Solar Limited ( TSL): Designs, develops, manufactures, and sells photovoltaic (PV) modules worldwide. Market cap at $916.86M, most recent closing price at $12.87.

 

(Written by Chris Lau, a Kapitall Contributor. Monthly return data sourced from Zacks Investment Research. All other data sourced from Finviz.)

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