Chinese solar manufacturer Trina Solar Limited (TSL) produced a strong earnings beat when it reported Q1 2014 earnings before the opening bell on Wednesday. And, in what has now become a fairly predictable market reaction, it was boosting the stocks for the entire solar industry as a result.
Trina Solar Boosts Margins, Crushes Expectations for Q1 Profits
Trina Solar’s earnings report was a solidly positive one. Well, depending on who you ask, the revenue produced was either slightly ahead or slightly behind expectations. The $444.8 million in revenue was slightly behind the consensus from a Reuters poll of $452.55 million but slightly ahead of a $441.9 million consensus estimate from a Factset poll.
It did, however, represent a year-over-year increase of more than 70 percent. And it also translated into significant profits as well. For, while the revenue was fairly close to analyst expectations, the profits blew them out of the water.
Trina earned $0.37 a share, crushing the $0.03 estimate from both Reuters and Factset. The gains were driven by a 36.4 percent increase in gross margins from Q4 of 2013 from 15.1 percent to 20.6 percent. This helped drive the eye-popping 73.5 percent increase in net income from last quarter to $26.5 million.
"I am pleased to report that we delivered another set of solid results despite some headwinds in the first quarter,” said Chairman and CEO Jifan Gao. “We remain focused on maintaining profitable growth as opposed to pursuing volume growth alone. By employing this strategy, we increased our gross margin to 20.6% this quarter, a significant improvement from the previous quarter's 15.1%. This improvement underpinned a net income increase of 73.5% quarter-over-quarter. Trina continues to see the positive impact of our focus on efficient operations, controlled business expansion and disciplined financial management.”
Stock Climbs in Response to Increased Profits
Trina Solar’s investors got precisely the sort of spike they would hope for as a result of the solidly positive first quarter.
The stock gapped up 11 percent at the opening bell to $11.50 a share, but it was far from done. After the initial spike, gains kept building throughout the morning to hit $13.55 a share just after 1 pm ET. Gains pulled back some immediately after but stayed near $13.40 a share for a gain just under 30 percent on the day.
Rising Tide Raises All Solar Stocks
And, as usual, the huge jump in earnings for Trina resulted in a run on solar stocks across the board, with most major companies posting gains. Yingli Green Energy (YGE) was up almost 11.25 percent, ReneSola (SOL) climbed over 12.5 percent, and JA Solar Holdings (JASO) saw gains approaching 5 percent.
And, the Guggenheim Solar ETF (TAN) , probably the most representative security for the industry as a whole, was up over 4.75 percent.
Trina’s earnings beat comes at a welcome time for the solar industry, which has been more-battered than almost any other segment by the sell-off in growth plays that’s gripped the markets since March. The TAN ETF was off over 25 percent from March 7 to yesterday.
Future Bright for Solar Industry?
However, Trina’s earnings may help the industry start to shake some of its perception as a risky growth play and establish some of these stocks as profitable companies in an industry poised for rapid and consistent growth in the coming decades.
In February, China set targets to install 14 gigawatts of solar capacity, increasing its 12 GW goal from 2013. This would be made up of 8 GW coming from distributed generation (read rooftop solar projects) and and 6 GW from utility-scale projects.
This has prompted some questions from industry analysts regarding the industry’s ability to meet this demand, particularly the 8 GW of distributed generation. The aptly-named CFO of Trina, Teresa Tan, reiterated these doubts about China’s target in a call with analysts, saying “we doubt that this 8-gigawatts goal will be reached in this year, simply because of the complicated business module and the competition involved in expanding in this region. From our research, it’s very clear that the distributed generation market is relatively immature.”
However, for Tan, and potentially the rest of the industry, the short-term macro-targets from the Chinese government ultimately matter far less than the long-term trends in installation.
“From our perspective, it doesn’t really matter if it’s a ’11 or ’12 or ’13 or ’14, … being the leader in providing module and downstream projects, we believe that as we are gaining market share and as our brand and quality of service are being recognized, the demand for our product is very much evident,” she said on the call.
On the whole, guidance for shipments in 2014 is high. Very high. Among the 20 biggest suppliers of solar panels, shipments for 2014 are anticipated to grow by almost a third. With the company anticipating the largest shipments in 2014, Yingli Green Energy, posting its Q1 earnings on Friday, it seems possible that the industry could be poised for another big reversal if Yingli beats expectation.
The current downtrend for solar stocks appears to be part of a larger market trend, with investors fleeing solar stock indiscriminately even as some continue reporting serious growth with predictions of even more in the future. What’s more, the industry was due for a correction following a huge 2013, making it one of the most obvious victims of the bigger market correction we’ve seen since early March.
That said, nothing breaks a trend like hard data, and if large solar companies can continue to make money, solar stocks could be in for even more gains in the next year.
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