Trina Solar: Price Estimate Revised Below $10 on Disappointing Margins

Trina Solar (NYSE:TSL) recently announced its fourth quarter and full year 2011, posting higher than expected sales volumes but a fall in gross profits. The company managed to sell 425 MW of panels in the last quarter, in comparison to its 320 – 350 MW sales guidance but gross margins for the quarter fell to 7.1% from 10.8% in Q3. ^[1] Trina had provided gross margins guidance of 10%. The fall in gross margins indicates that prices are falling faster than the company’s cost-cutting efforts. Selling and Administrative costs also increased by almost 30% in 2011 over the previous year and R&D costs more than doubled over the same period, pulling down our estimates for the company’s performance. Other solar companies such as First Solar (NASDAQ:FSLR) also reported disappointing earnings.

We have revised our price estimate for the stock to just under $10, which is more than 25% ahead of its current price.

Click here for our full analysis of Trina Solar.

Prices falling faster than costs

Trina Solar’s results indicate that solar panel prices were falling faster than production costs despite rising sales volumes. Panel sales jumped in the last quarter, driven by demand from Germany and sales from growing markets such as the U.S. and China. Trina’s stock was also impacted by an announcement from the German government that it would hasten cuts in subsidies and cut support by almost 30% to put checks on capacity coming online. ^[2] Germany is the world’s largest market for solar panels, and further subsidy cuts could put more downward pressure on panel prices in the future. Industry executives are hoping that demand from China, the U.S. and other emerging markets can offset falling demand from European countries.

In addition to a decrease in gross margins, rising indirect costs including higher R&D costs pushed down our estimate for Trina Solar. Our estimate for the company has almost fallen by 5% in light of its recent results and the possibility of a stagnation in sales in Germany.

Tariff imposition

Trina Solar included a $3.3 million charge on its U.S. shipments in the month of December, on an expectation that the country would impose tariffs on Chinese solar imports. ^[2] A group of American solar companies have pushed the U.S. Department of Commerce to impose trade penalties on solar equipment from China, accusing the companies of dumping products below production costs. Trina is expecting an 8% retroactive tariff, which is lower than some analyst estimates. The company is looking to shift production out of China to work around any possible tariffs. CFO Terry Wang said that Trina was planning with partners outside the country to outsource production.

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1. Trina Solar Announces Fourth Quarter and Fiscal Year 2011 Results, Trina Solar [↩]
2. WRAPUP 1-Trina Solarworld post losses German cuts hit stocks, Reuters [↩] [↩]