First Solar Inc Might Not Be the Best Solar Investment

Most solar stocks have been taking it on the chin given the broad market sell-off we've seen over the last month. And the pain is being felt across the board, from module makers to residential installers. Both Trina Solar (NYSE: TSL  ) and SolarCity are down more than 25% year to date. Meanwhile, First Solar (NASDAQ: FSLR  ) is up nearly 25%. However, First Solar might not be the best solar investment.

Where we are with solar
First-quarter earnings aren't out yet, but the signs are pointing to another stellar quarter. Demand for the first quarter was estimated at 25% more than demand for the same quarter last year.

Manufacturers should see an improvement in business for 2014. That's because supply exceeded demand in 2013, depressing prices and margins. However, prices have started to rise. And there are a number of value opportunities in the market, where earnings are growing as stock prices are declining.

The best investment in the industry?
Trina Solar has a vertically integrated business and could be the best investment in the industry. Trina Solar reported earnings per share that came in better than expected for the fourth quarter. Earnings were $0.13 a share compared to analysts' consensus estimate of $0.04 . Operating income amounted to $14 million against the loss of $70 million in the previous year.

The really good news is that panel shipments were 770 MW, which is an 85% increase year on year. Much of the growth came from China, which contributes 40% of revenue. But growth was also healthy in other markets such as the UK and Japan. China is expected to continue to drive growth because of the targets set by the Chinese government; and the company's guidance for 2014 estimates 40% further growth to between 3.6 GW and 3.8 GW.

Average selling prices saw an increase from $0.64 per watt in the preceding quarter to $0.66 per watt because of higher realizations in Europe and China. The company expects pricing to be stable during 2014. Trina has been operating above the rated capacity of 2.4 GW per annum for cells and modules but has now entered into strategic agreements to increase this to between 3 GW and 3.8 GW.

It should be able to scale up production quickly because the additional capacity will be contributed by existing manufacturers. Simultaneously, during 2013, final manufacturing costs shrunk by 22% because of better operating efficiencies.

The remaining concerns
Despite all the good news on the operating front, Trina's panel-manufacturing business is at the commodity end, and an operating margin of less than 5% is thin. The company will need to focus on generating long-term earnings growth by enhancing its presence in the profitable solar-projects business and moving away from residential installation.

The company expects a better year in 2014 and estimates panel shipments to downstream projects of between 400 MW and 500 MW. It has also entered into a strategic framework agreement to build a 1 GW project in Xinjiang in western China.

The four-year time frame for execution should see the first two phases completed by 2014, giving the company a solid platform for its expansion into the project business. It also just exited its first large-scale new project in China by selling a 50 MW plant to clean-energy company Huadian Fuxin to be set up in Wuwei, Gansu province.

Wall Street is coming around
Analysts are beginning to revise their earnings estimates upward. Current quarter estimates have gone from an expected loss of $0.09 per share to a loss of $0.04 a share. What's more, current-year estimates have risen from $0.50 a share to $0.77 a share.

It's encouraging that shares have started to move upward, gaining more than 11% over the last few weeks. Trina Solar was also awarded a $20.4 million arbitration settlement over a purchase agreement for solar modules. Trina trades on the cheap side compared to its peers, with a P/E of 7 based on next year's earnings estimates. First Solar trades at a 14.5 P/E, and SolarCity's P/E is incalculable given its negative earnings.

Bottom line
Growth in the solar industry should be solid this year. Even without the industry growth, Trina Solar is a solid investment on its own. For investors looking for a solid play in the solar energy space, Trina is worth a look.

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