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Trina Solar is cheap, really cheap.

June 30th, 2008 · No Comments

Very cheap indeed, with earnings estimates between $3 and $4 for THIS year, it’s trading at a p/e less than 10. For a company which still enjoys triple digit earnings and profit growth, this doesn’t make much sense.

We are, of course, not the only ones who argue this case. Take Larsen Kusick from The Street.com:

Finally, Trina Solar(TSL) stands out because of its vertical integration strategy — self-funding a large portion of its polysilicon demand by recycling silicon from the semiconductor industry. I included TSL after I noticed how cheap shares were relative to earnings expectations (which vary greatly among sell-side analysts).

He compares five solars, and Trina is by far the cheapest on any multiple. The price/sales multiples of the following companies are (stockprice 26/6, 2008 p/s; 2009 p/s)

  • First Solar (FSLR): 288.22; 22.2; 12.3
  • Energy Conversion Devises (ENER): 79.19; 12.8; 7.3
  • Suntech (STP): 41.55; 3.4; 2.3
  • Sunpower (SPWR): 81.39; 4.7; 3.3
  • Trina Solar (TSL): 36.74; 1.2; 0.7

Some basic facts on the price to sales multiples:

  • ENER and FSLR have 10-20x the price to sales multiple of Trina
  • Valuation wise, it’s closest rival is Suntech (STP), but even their multiples are three times those of TSL
  • And these price to sales multiple are taken with a stock price of 36. 74, today, TSL trades around 30 (it just dipped below that), so already the cheapest by far, it gotten 20% cheaper.

He had this to say about TSL:

But adding two quarters of analyst estimates to the data shows us that there are high expectations on Trina Solar. Over the past four quarters, the company has tripled its revenue, going from $42.5 million in the first quarter of last year to $120.7 million in the first quarter of 2008. While these results are impressive, analysts are already expecting the company to maintain this growth, almost doubling sales to $225.4 million by the third quarter.

If relative valuations make any sense, this can only mean two things:

  1. The revenue growth is priced in.
  2. There must be some margin squeeze.

The first is abject nonsense. If that would be the case, Trina would have the highest multiples, not the lowest. Margin wise, although not quite in the thin film (FSLR, ENER) league, they’re on the top end of the traditional silicon players, mostly as a result of their integrated business model.

If there is a margin squeeze, it could only come from increasing polysilicon prices, and that would affect other solars (although not the thin film players) as well.

This depends to a certain degree on how much supplies they have secured already via long-term contracting, and what the pricing models are in these long-term contracting, but even assuming the worst, that Trina is more exposed than others with regard to polysilicon prices (there are no indications of that), this would not be able to explain anything near the valuation gap, or better, valuation chasm that we see.

On a price/earnings (p/e) basis, TSL things do not change, TSL is still by far the cheapest, here the p/e’s for 2008 and 2009 (still using the same stockprices used above):

  • FSLR:   97.4 49.5
  • ENER:    –     53.5
  • STP:     26.3 16.2
  • SPWR:   37.3 24.2
  • TSL:      11.7 8.8

There is also some good news out, Trina is making significant inroads into the Italian market with a large ($158M) order, which is positioned to be one of the next growth markets for solar energy.

So, does Trina’s cheap valuation make sense? No. We also believe that we’re very near the bottom:

There might be one more lurch downward to 27.5 or so, but unless we have a market crash, we don’t think we’ll go below that. We’re also oversold, so a bounce is due.

Tags: Solar sector · TSL