Solar Manufacturers May Have a Rough Quarter

The market for solar is growing around the world but one of the biggest names in solar is already saying that the second quarter won't be the big turnaround the industry is hoping for. Trina Solar (NYSE: TSL  ) said yesterday that its shipments and margins would be below previous expectations.

In the updated guidance for the second quarter (which ended a month ago), the company said it shipped between 390 MW and 420 MW, lower than its old guidance of 500 MW-520 MW. Gross margin is now expected to be between 7% and 9% instead of the 10% it had previously thought.

There are three things that could be driving Trina's disappointing numbers, and likely a bit of each is affecting it. The first impact is a price war that is going on among solar manufacturers around the world. Companies at the bottom of the food chain have likely been even more aggressive with pricing as they have become more desperate. This would include the usual suspects like LDK Solar (NYSE: LDK  ) , Renesola (NYSE: SOL  ) , and Hanwha SolarOne (Nasdaq: HSOL  ) . These companies have added capacity and have unsustainable debt loads, and since their products are considered inferior to top-tier manufacturers they must battle on price.

The second thing likely impacting sales is a major shift in demand around the world. Europe is struggling, meaning the U.S. and Japan will provide two of the best markets for solar this year. In the U.S., SunPower had by far the largest market share in the first quarter according to GTM Research. Chinese firms will be hurt further by import tariffs here. Trina isn't yet a major player in the U.S. market, but Suntech Power and Yingli Green Energy (NYSE: YGE  ) have significant share in the U.S. so they may not be as heavily affected by markets shifting away from Europe. In Japan, the market is just starting to grow and local manufacturers will be the first to benefit.

The last thing I will be watching closely this quarter is the effect quality and efficiency is having on financial results. SunPower managed to beat most Chinese manufacturers in gross margin in the first quarter because if has higher efficiency and makes a bankable module. If the trend of efficiency mattering more than cost continues it could be impacting all Chinese manufacturers.

Earnings will begin rolling out next week so we'll get a better feel for how the quarter played out and how the market is trending in solar at that time. For now, we know that it wasn't as good as Trina Solar had hoped.

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Fool contributor Travis Hoium owns SunPower in both personal and managed accounts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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  • Report this Comment On July 31, 2012, at 1:24 PM, solardave wrote:

    Travis, I am concerned that your comments look more and more like advertisements for SPR, which you personally hold and also is in funds that you manage. This concerns me.

  • Report this Comment On July 31, 2012, at 8:37 PM, TMFFlushDraw wrote:

    @solardave

    People don't like it when I don't put my money where my mouth is when talking about stocks and people think I'm advertising when I talk positively about a stock I own. We can't win.

    Take my position, which is disclosed in every article, as something you should be aware of with any writer. With that in mind, I've presented my investing thesis and over the next few weeks we'll see if I'm right.

    Feel free to disagree with my opinion if you think it's wrong.

    Travis

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