Sometimes, when you see a light at the end of the tunnel, it turns out to be an oncoming freight train. So far, that's not the case with Trina Solar (NYSE: TSL ) , which just reported a respectable quarter.
Shipments rose by more than 30% sequentially, while price declines held sequential revenue growth to just 13.5%. Thanks to plunging polysilicon costs (which dropped by more than 30%), in addition to lower non-silicon manufacturing costs, Trina's gross margins fattened up to 27.4%. That's well ahead of the figure reported by Canadian Solar (Nasdaq: CSIQ ) , which had a pretty strong outing itself.
With such aggressive cost reductions being achieved, integrated Chinese players such as Trina and Yingli Green Energy (NYSE: YGE ) are really causing Western companies to sweat. Germany's Q-Cells, for example, just took a slew of measures to improve its cost structure so it could better compete. The market-share gains by Chinese players are even causing some rumblings out of Germany about paring back its world-leading subsidy program. Boy, would that throw this solar resurgence off track in a hurry!
Anyway, back to Trina's quarter. A recent Barron's piece challenged First Solar's (Nasdaq: FSLR ) earnings quality, when it pointed out that despite the heady sales and operating-income figures, accounts receivable grew faster than revenue, and free cash flow was negative. Neither criticism seems to apply to Trina, whose cash collections helped it ring up around $26 million in free cash flow, according to management.
Investors have warmed to Trina's story. They've bought into a recent equity fundraising round that netted the company more than $140 million. I can see the appeal, but the valuation is no longer compelling after the shares' huge run from their lows. We probably won't see those single-digit share prices again any time soon, but I think potential investors will get a better entry point in the months ahead, especially if Germany suddenly gets stingy with its subsidies.
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