Risk-Return Trade-Off: Trina Solar
After a fresh bout of crisis hit the solar industry in the form of a waste spillage incident by JinkoSolar (NYS: JKS) , investors may think no solar stock is worth their money. However, those stocks shouldn't be neglected outright, especially since solar is the next energy frontier.
Having said that, let's take a detailed look at Trina Solar (NYS: TSL) , a company that is pumping up its shipments crazily but still taking a beating as far as margins and share prices are concerned.
A mixed bag
Over the past three years, the company's revenue grew at a compounded annual rate of 65%, whereas in the last 12 months, revenue jumped a stupendous 80%. This is remarkable considering that others in the industry have suffered as a result of subsidy cuts in key markets like Germany and Italy.
In the just-concluded quarter, the company bumped up its shipments by a terrific 80% and also managed to fatten its top line by 56% from last year. However, Trina Solar failed to escape the slowdown in the industry, as a fall in average selling prices throttled its margins.
But the company remains optimistic about the industry's prospects in the latter half of the year and is striving to develop its capabilities. Also, Trina has been expanding itself quite aggressively, and it has a presence in Australia, the Middle East, and the Gulf states. Being based in China has its own disadvantages, as investors may never completely trust what's going on with the company. However, we cannot ignore that the solar industry is rapidly growing in China and that the government plans to grant 50% subsidies to solar products over the next two years. Trina, being among the biggest solar companies in China, is expected to ride this wave of solar development there.
Let's take a look at how Trina is valued as compared to its peers.
Yingli Green Energy (NYS: YGE)
SunPower (NAS: SPWRA)
First Solar (NAS: FSLR)
Source: S&P Capital IQ.
We see that analysts have doomed the company's next-year earnings estimates. On one hand, Trina trades at a dirt cheap multiple -- as the market doesn't expect much out of solar stocks, especially if they are Chinese -- but on the other hand, we see the forward multiple tripling after analysts factored in the Haining accident. Estimates suggest that Chinese solar companies will be negatively affected after the Haining disaster as their reliability comes into question. Thus, even if we consider Trina's expansionary moves, the stock becomes risky to hold as we never know how the next development in the industry will hit Trina.
Yingli, another Chinese company, shares the same fate as Trina. However, SunPower and First Solar, two U.S.-based companies in the list, have risen in the eyes of analysts because of their strength and reliability.
The Foolish takeaway
Your decision depends upon your appetite for risk. Trina may give better returns when its plans of expansion and cost-cutting materialize. But that will take time, and you may even lose a lot if something goes terribly wrong with it. We should never forget that it operates out of China. The choice is yours if you wish to place a bet on Trina, but if you wish to invest in more reliable solar stocks, U.S.-based companies are always there for you.
To stay on top of the latest news and views about Trina Solar, add it to My Watchlist.
At the time this article was published Fool contributor Harsh Chauhan does not own any of the stocks mentioned in the article. The Motley Fool owns shares of First Solar.Motley Fool newsletter serviceshave recommended buying shares of First Solar. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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