November 23, 2007
When Trina Solar (NYSE: TSL ) announced third-quarter results on Wednesday, investors were clearly not in a thankful mood. The lower-than-expected earnings result prompted Mr. Market to carve 24% out of Trina's market cap.
Most media reports pegged the quarter's shortfall on higher polysilicon costs and lower selling prices, but that's only the case on a year-over-year basis. When companies are growing as rapidly as solar shops like Trina and SunPower (Nasdaq: SPWR ) , I tend to find sequential comparisons more valuable. Everyone watching this space knows that polysilicon has been playing hard to get in 2007. There's a better explanation for the sharp sell-off.
Sales were pretty solid, up about 10% sequentially, and gross margins improved over last quarter, so we know the issue wasn't about the cost of raw materials or selling prices. We have to look a bit further down the income statement to get the real dish. There's your culprit: Operating margins got gobble-gobbled up by higher overhead and R&D costs. Sure, the business is growing at a decent clip, but a 58% sequential rise in operating expenses? Good gravy!
Granted, First Solar's (Nasdaq: FSLR ) operating expenses were up almost 50% over the prior quarter, but that flourishing company doubled its revenue. Trina is simply not managing its growth as gracefully.
As far as Trina's exposure to polysilicon goes, it's a bit of a mixed bag. The company has secured about 70% of its supply needs for 2008, as well as some longer-term arrangements, but partners like The Nitol Group have never produced the stuff before -- just one of its key chemical components. Trina also plans to produce its own polysilicon, but the capital outlay is several times the company's cash pile. This need to tap the capital markets is decidedly unappetizing.