Trina Solar Limited Earnings: Size Doesn't Mean Profit in Solar Manufacturing

Being one of the global powerhouses in the solar industry isn't necessarily a formula for investment success, and Trina Solar Limited (ADR) (NYSE: TSL) is showing proof of that once again. The company reported third-quarter earnings on Monday morning and failed to produce a profit despite being one of the largest solar manufacturers in the world.

Falling solar prices have wreaked havoc on solar manufacturers, and so far not even building projects can turn around operations.

The conundrum facing solar companies today
Trina Solar built an incredible 1.7 GW of solar modules in the third quarter, nearly enough to supply the entire U.S. solar market in 2011 (1.9 GW). That figure alone is incredible, but being the largest solar manufacturer in the world hasn't led to success in the past, and Trina Solar is feeling some of that pressure.  

Despite growing module shipments by 70%, Trina Solar saw net revenue grow just half that, and the company actually swung to a net loss for the quarter. The results were hurt by a $45 million settlement with Solyndra, but even without that, net income would have been just $23.7 million.

Data source: Company earnings release.

To be fair, Trina Solar is building solar projects on its balance sheet that accounted for 350 MW of module shipments in the quarter. If those modules had been sold on the open market, gross profit could have been $40 million higher.

A similar "high volume growth, shrinking profit" narrative is playing out for competitor Canadian Solar (CSIQ -0.83%), which is one of only a few companies with nearly as much capacity as Trina Solar and challenges Trina in the Chinese market. But U.S. tariffs are eating into profits, and Chinese demand, while robust, doesn't add much to profitability. Trina Solar's net margin, even after adjusting for the Solyndra settlement, was just 3% in the quarter -- not much different from Canadian Solar's 3.6%.  

Does the future look bright or dim for these manufacturers?
Considering the fact that Trina Solar makes a very similar product as Canadian Solar (or just about any other Chinese solar manufacturer) does, I have to wonder how bright the future is there. Both companies are rapidly expanding production in the face of falling prices and uncertain demand in the next couple of years.

According to projections recently presented by Canadian Solar, China and Japan are both expected to see solar market declines in 2016, and the reduction in the Investment Tax Credit in the U.S. means 2017 will likely be a down market here. In total, growth between 2015 and 2017 is expected to be just 6.6% compounded annually, a far cry from the rate manufacturing is growing.  

If Trina Solar, as the biggest solar manufacturer in the world, can't make money in the robust demand environment we see today, why should we expect it to make money in the near future?

I think the margins Chinese solar manufacturers are seeing are too low, and the risk of being upended by better technology in the future is too high, for investors to buy in today. The grim bottom-line numbers show weakness despite top-line growth, and that will hold back these stocks from being market beaters in the long term.