As the market took a nosedive yesterday, there was one stock flashing green on my screen all day. That was Chinese solar leader Trina Solar (NYSE: TSL), which reported earnings that not just beat expectations but absolutely crushed them.

The earnings beat itself wasn't surprising, but the amount was. Analysts had expected earnings of $1.09 per ADS, but Trina reported $1.87 as increased prices helped drive margins higher. In-house margins rose to 36.5% as profit per watt increased to $0.66. Revenue was up 104.9% from a year ago since the company rapidly added capacity to fill demand.

Trina isn't the biggest Chinese manufacturer, leaving that title to Suntech Power (NYSE: STP), but it is trying to catch up. The company ended 2010 with 1.2 GW of module capacity and is expected to end 2011 with 1.9 GW of capacity. If pricing stays anywhere near what it was in the fourth quarter, we could be in for big gains in 2011.

Geographic diversification is also moving forward nicely, and Trina expects less than half of 2011 sales to come from Germany, Spain, and Italy.

Cooling off this hot stock
As great as these numbers look I'm not nearly as impressed as the market. Trina Solar has become known as a cost leader, even among Chinese competitors, but this quarter was a step in the wrong direction. Cost per watt increased $0.08 from the third quarter, to $1.16 per watt. This puts Trina in line with the third-quarter numbers of Hanwha SolarOne (Nasdaq: HSOL), formerly known as Solarfun, and much closer to the pack. The cost lead that Trina had appears to be evaporating.

Chinese manufacturers have seen lower costs largely because of falling silicon prices, but the rubber hits the road with non-silicon costs. On this front, Trina only expects to cut non-silicon costs from $0.74 this quarter to $0.70 by the end of 2011, so costs will still rely heavily on silicon prices. As innovators like SunPower (Nasdaq: SPWRA)(Nasdaq: SPWRB) continue to cut costs from its high-efficiency panels and First Solar (Nasdaq: FSLR) extends its lead in cost per watt, Trina needs to do more to keep up.

Just ask Evergreen Solar (Nasdaq: ESLR) how important it is to stay ahead of the cost curve in solar. The company is struggling to survive despite a recent move to China and with so many competitors, continuing to cut costs is vital.

I don't mean to be a Debbie Downer on the quarter, but the rise in cost per watt was a huge red flag in these numbers. Trina can't rely on higher prices to help margins in the long run, and the company's cost numbers are headed in the wrong direction.

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Fool contributor Travis Hoium owns shares of cost leader First Solar and efficiency leader SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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