Trina Solar (NYSE:TSL) is a technology company that operates in the specialized semiconductor industry. It is a vertically integrated solar panel manufacturer involved in the development and manufacturing of silicon ingots, wafers, cells, and PV modules (solar panels). The company also develops, designs, and distributes solar power projects in residential, commercial, and utility markets. Note that the power projects and services business has higher margins than module distribution. Trina primarily generates its revenue through the sale of PV modules and doesn't have a significant downstream involvement. The company's revenue breakdown for 2013 is as follows:

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Data from Trina Solar

Market performance
Like other solar stocks, Trina showed spectacular performance in 2013, with shares rising about 205% thanks to recovering ASP and improving demand within the solar industry. The company returned to profitability in the second half of 2013, which resulted in positive investor sentiment.

However, shares have declined by roughly 8% in the last month or so. This can be attributed to Trina lowering its module shipment guidance for the first quarter of 2014 from 670-700 MW to 540-570 MW. However, that should not be a cause for alarm because the company upgraded its margin guidance from the mid-teens to 18%-20% and reaffirmed its full-year guidance. 

Financial and operational highlights
The company posted revenue of $1.77 billion in 2013, which was 36.9% growth over 2012. PV module shipment reached 2.58 GW during the year.
Trina reduced operating expenses via a 41% decrease in general and administrative expenses and lower research and development costs.

For 2014, Trina aims to increase its module capacity to 3.8 GW and expects module shipments to be in the range of 3.6-3.8 GW. It also expects 400-500 MW of downstream construction, which translates to 47.3% growth over present results. The company has about 448 MW of projects in the pipeline, according to the 2013 annual report. Furthermore, it recently signed an agreement to develop a solar power plant project in Xinjiang, China, which will boost its pipeline to over 1 GW.

Financial and operational takeaways
The increasing demand for solar products is reflected in the company's module shipment and revenue growth. Trina is also reducing its manufacturing cost per watt, which has resulted in an improved gross margin for the company. The gross and net margins will continue to improve due to Trina's manufacturing cost reduction, economies of scale, and increasing investment in the downstream business. Moreover, the fact that Trina returned to profitability, in contrast to Yingli Green Energy (NYSE:YGE), despite its lower current production capacity (around 2.5 GW as compared to 3.2 GW for Yingli) indicates that it has better cost and overhead management. All in all, Trina's key financial and operational outlook looks quite positive

Geographical advantage
The global solar industry is set to grow around 20% this year. China, the U.S., and Japan are respectively expected to install 10 GW, 7 GW, and 6 GW in 2014 (China is targeting 14 GW). This places Trina in a favorable position based on its historical revenue share. The company generated about 58.5% of its revenue from those three countries, so growth in these regions will definitely boost Trina's revenue in 2014 and beyond. However, silicon prices are expected to rise to $24/kg by the end of the year, from $20/kg in recent months, and this will put a cap on margins.

Efficiency progress
Trina is making headway in the solar cell and panel efficiency department, recently achieving 24.4% cell efficiency in a laboratory environment. The laboratory-scale interdigitated back contact, or IBC, cell was developed at the Australian National University.

"The back contact cell structure enables the end user to gain more electricity per unit area and more favorable appearance," according to Andrew Blakers, director of the Centre for Sustainable Energy Systems at the ANU Research School of Engineering.

The company also achieved a power of 326.3 W for a panel containing 60 cells of 156×156mm. In simple words, it achieved more power using smaller solar panels due to the higher efficiency of its solar cells. The following table gives a competitive perspective:

 

SunPower

TrinaSolar

Yingli

Conversion efficiency*

24% 

22%

19.7%

Modular efficiency

23%

21%

18.7%

Power/area*

0.03watt/cm²

0.02watt/cm²

Deem to be lower due to lower efficiencies

*Recently unveiled cells

*Calculated using data from SunPower X-series and TrinaSolar press release data

A look at the efficiencies reveals that the gap between SunPower (NASDAQ:SPWR) and Trina has shrunk. SunPower still holds the power/area advantage which is considered to be important in area-constrained scenarios. However, the primary advantage lies with Trina if we consider the cost and pricing of the products because the power density difference isn't that significant. Trina's improved offerings are expected to help the company achieve its 3.6-3.8 GW shipment guidance.

Investment value and final thoughts
Looking at the forward price-to-earnings ratios of the industry as a whole, Trina is among the cheapest stocks. Downstream solar stocks have relatively high P/E ratios as investors see value in the high margins associated with downstream stocks. Incorporating the downstream business growth of Trina into the valuation gives the following price target:

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*FirstSolar and SunPower average

**JA Solar, Yingli and Trina Solar average

Trina's future outlook is bright due to anticipated growth in several favorable geographical regions, constant cost reductions, and efficiency improvements. The company is positioned to compete with U.S. players on cost leadership, and with Chinese suppliers through differentiation. The valuations above also show that Trina is a reasonable investment at the current price.

 

 
 

Muhammad Saeed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.