Trina Solar (NYSE: TSL) earlier this week posted third quarter earnings per share of $0.29 and $548.4 million in revenue, beating estimates. Solar stocks declined across the board: Yingli Solar (NYSE: YGE) dropped by 10.9%, SunPower (SPWR -3.17%) by 7.1%, and SunEdison (SUNEQ) by 5.5%. Are the fundamentals for solar investment still there?
What's going on?
Trina Solar saw solar module shipments rise over 19% in Q3 to 775 megawatts and its gross margin rise to 15%. It increased its shipment guidance another 200 megawatts.
All great news on the surface, but still Trina Solar has a lackluster operating expense rate due to wafer and module production, a huge debt of over $2 billion, and cash flow holding steady.
Since 2008 solar module prices have fallen more than 80%. Also since 2008 solar module volumes have risen from 13 gigawatts to over 150 gigawatts. More production capacity usually brings with it more manufacturing efficiency. However, solar module prices have fallen almost twice as much as the cost of production. This has resulted in Trina Solar's lackluster operating costs net of the cost of polysilicon materials, which have also declined since 2008.
Digging deeper into Trina Solar's value chain reveals more issues. At the front end of the chain is polysilicon procurement and shaping. Polysilicon prices are set to drop to $0.14/kg and, in 2-3 years, to $0.10/kg. Silver prices are also somewhat depressed but are beginning to climb as industrial demand grows. So the front-end procurement cost looks nominally good for production cost through 2014.
In the longer run, polysilicon prices will rise slightly, and silver may have a comeback. At a 25% annual growth rate in solar module production, solar is outpacing jewelry for silver consumption. Yes, silver prices will go up as each cell requires more than 100 mg of silver.
However, with increased throughput, materials acceptance rates decline. In the short run this bottlenecks the production process and raises the overall cost per module in production. Product cost escalates further when wafers are sized and fitted into module assemblies.
Most solar module manufacturers designed their plants to run on about 1-2 shifts per day at best. With module demand taking off, the manufacturing facility needs to run 2-3 shifts per day to keep up with demand. Shipping delays are not tolerated by projects on tight deadlines in dodgy locations on the planet. The facility literally has to produce in spite of its less than optimal configuration to fulfill orders.
Where do we go from here?
The time may have been right for investors to take profits earlier this week, and realign their energy and renewables portfolios. It certainly halted the dizzying upward climb of Trina Solar and other solar stocks.
As a group, solar stocks have large debt loads relative to the cash flow they generate. All are in the risky business of dealing with cash-challenged and politically volatile federal, state/provincial, and local governments in emerging nations as these companies bid for recently established renewable energy funds.
Materials costs are flat now but may grow as demand outstrips existing wafer and silver supply. New p-type wafer technologies are on the immediate horizon. These technologies promise more output efficiencies for customers and simpler, smaller, and less costly setups for module manufacturers. Module manufacturers will be able to reconfigure plants to realize even greater cost savings. We are also seeing the segmentation of wafer and thin film producers from module manufacturers, which is further good news for cost-reduction across the solar value chain.
Trina Solar and other solar stocks are still a good long-term value play, as a portfolio at least, and with more attractive prices may be a good buy.
