Analysts tripped over themselves to upgrade solar manufacturer Trina Solar (NYSE:TSL) yesterday. The company's earnings report caused the stock to pop on Tuesday and Ardour Capital and Maxim Group both upgraded the stock to a buy yesterday.
But let's keep in mind that Trina Solar reported a pretty big loss in the second quarter and investors need to keep both the good and the bad news in mind when considering this investment.
Gross margin was up to 11.6% in the quarter from 1.7% last quarter and is expected to rise slightly through the rest of the year. European margins should improve with new trade agreement between the EU and China and strong margins from Japan will help, something we're seeing across the industry.
The company was also able to repay debt in the quarter, a strong sign that the balance sheet is slowly improving. One of the reasons it was able to do that was a reduction in inventory from strong shipments.
Trina is also running its plants at over nameplate capacity, which spreads costs -- particularly depreciation -- out over a larger number of modules. That helps lower cost per watt and helped push gross margin into double digits.
Despite making more than capacity, improving sale prices, and falling costs, Trina Solar still lost $33.7 million in the quarter. That's $0.076 on every dollar of sales, even after adjusting for a writedown. To reach a breakeven point the company will need to increase gross margin to over 17% based on this quarter's costs, which will require continued high sale prices (very possible) and reduction in costs, which will require falling poly costs.
Running over capacity is a best-case scenario for any company so investors shouldn't count on that forever. Management also wasn't expecting high margins for systems built in China, choosing to hold them on the company's balance sheet if necessary. This has been the one bright spot for U.S. suppliers and it doesn't appear to be the same margin-expanding venture in China.
Good but not great news for investors
Trina Solar is close to reporting an operating profit but still isn't quite there, despite a very strong solar industry. By comparison, competitors JinkoSolar (NYSE:JKS) and Canadian Solar (NASDAQ:CSIQ) have already reported operating profits and JinkoSolar even reported net income in the second quarter. Both companies also reported higher margins than Trina Solar.
Don't get me wrong, Trina Solar is in a much better position than Yingli Green Energy or LDK Solar, simply because it has less debt. The problem is that it has enough debt and low enough margins to make a long-term profit unlikely. Like most other Chinese solar manufacturers, Trina Solar needs a perfect storm of stable or rising sale prices, increasing demand, and falling costs to make a profit. That doesn't even bring into account the next generation of solar equipment that will be built, which most Chinese companies don't have the capital to buy.
Trina Solar is improving, that's without question right now. I simply think JinkoSolar and Canadian Solar are better companies and have a better chance to make a profit in the long term. Trina's $1.2 billion in debt is a big hurdle to overcome and the company doesn't have the same exposure to highly profitable system sales as competitors.