The Solar Road Not Taken

Back in late 2007, Trina Solar (NYSE: TSL  ) almost made a really terrible mistake.

Polysilicon -- a key input in standard solar cell manufacturing -- was in severe shortage mode. Each new supply deal signed by the likes of Suntech Power (NYSE: STP  ) and Yingli Green Energy (NYSE: YGE  ) had solar investors sighing with relief.

Rather than following Suntech's model of "virtual integration," Trina toyed with the idea of moving into in-house polysilicon production, going as far as signing a development agreement on a $1 billion plant with a Chinese municipality. The company scrapped this plan a few months later, signaling a sunset for the silicon shortage.

And that, Mr. Frost would say, has made all the difference.

Trina is one of the most globally competitive solar companies today. While the company hasn't weaned itself off of routine external financing, this is one of the better-capitalized solar shops. Had Trina pursued its polysilicon endeavor, it might be struggling right alongside LDK Solar (NYSE: LDK  ) and Hoku Scientific (Nasdaq: HOKU  ) today.

Speaking of which, LDK reported its fourth-quarter results yesterday. Even though the wafer maker had pre-announced revenue, along with wafer and module shipments, the company still managed to disappoint.

One key problem is that falling spot silicon prices, which have declined dramatically from the heady days of 2008, keep fouling up LDK's cost of goods sold. The company had nearly 3,000 metric tons of higher-priced inventory at year's end, so margins could remain compressed for a while.

Next, there's the ongoing cost of LDK's polysilicon plant construction. That project has been a big cash drain, and is a major source of the company's self-acknowledged "liquidity problem." The CFO spoke on the company conference call about trying to limit capital expenditures in the future, but it's hard to take that commitment too seriously -- and my skepticism isn't just limited to this one player.

This is the solar sector we're talking about -- with growth as far as the eye can see; companies will keep throwing huge sums at risky expansion projects. A lot of shareholder wealth will be destroyed in the process. Pull up a long-term chart of LDK to see what I'm talking about.

LDK's poly plant project, which looked like a brilliant idea in 2007, makes for an interesting cautionary tale. Investors may be best off sticking to solar-related companies that let others do the heavy lifting. Something like Veeco Instruments (Nasdaq: VECO  ) could fit the bill, but I wouldn't recommend investing in a company with which Wall Street is so smitten.