Griffin’s big stake in Trina was short-lived last time, where he quickly begin unloading his shares the next quarter, and held a relatively meaningless stake before getting out of the company completely during the fourth quarter of 2011. How long will Griffin stick around this time? I believe that investors and Griffin both could see upside over the interim as the solar industry shows signs of stabilization, but not without inherent risks.
Trina and a number of other solar stocks, including First Solar, Inc. (NASDAQ:FSLR), Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE), Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP), and LDK Solar Co., Ltd (ADR)(NYSE:LDK) have been pressured over the past couple of years due to oversupply in the industry. Trina and Suntech, two of the larger China-based solar product producers, have been working on this oversupply problem; last year both began scaling back production, driven by a slowdown in Europe.
The headwind for U.S. solar companies is the notion that funding may be drying up. However, Trina has its exposure to the rapidly growing solar market in China. The capital intensive industry, which requires large upfront CapEx, has led to speculation over whether major alternative and oil & gas companies should buy up solar companies to better fund projects. One such case was when SunPower saw supermajor Total SA take a 60% stake in the company a couple of years ago for a price that was 50% above its stock price. This could be the norm going forward.
Industry drivers
The Chinese government is planning to inject additional capital to the solar space, which should help drive demand for solar products in the coming years. Industry consolidation should further help with supply issues, where a number of smaller manufacturers have exited the industry due to uncompetitive cost structures. Market research firm ENF estimates that the total number of Chinese solar products manufacturers dropped from around 900 to 700 in 2012.
As solar installations show signs of rebounding, Trina’s aggressively low pricing should help it continue capturing market share. Even with its low-priced products, Trina has managed to maintain its solid operating margin:
| Operating Margin (5-year Average) | |
| Trina Solar | 12% |
| First Solar | 28% |
| Yingli Green Energy Hold. Co. Ltd. (NYSE:YGE) | 12% |
| Suntech Power Holdings Co., Ltd. (NYSE:STP) | 7% |
| LDK Solar | -1% |
Trina, and a number of other solar companies, are trading well below book value, which tends to be a solid valuation metric for the volatile solar industry. On a price to book basis, Trina is quite attractive, trading below top U.S. solar operator First Solar and other major Chinese operators:
| Price to Book | |
| Trina Solar | 0.44 |
| First Solar | 0.78 |
| Yingli Green Energy | 0.87 |
| Suntech Power | — |
| LDK Solar | 7.19 |
First Solar recently saw an upgrade from Citigroup, putting a buy rating on the shares, following news that the solar company had bought the Macho Springs Solar project, a project that will be New Mexico’s largest solar project and power 18,000 homes when complete in 2014. Suntech, on the other hand, has announced stoppage of two of its three production shifts at its Arizona plant, where production costs are now elevated due to tariffs imposed by the U.S. government. LDK Solar is one of the companies still recovering from the 2012 demand decline. The company released guidance that shows 2012 revenue may come in well below estimates. The company expects revenue in the range of $950 million to $1 billion, whereas analyst expectations are at $1.4 billion for 2012.
Don’t be fooled
Trina is down over 65% the last five years, now trading around $5.40 with a sub-$500 million market cap, and although Griffin is taking an interest in the stock, the position is a relatively small one in the grand scope of his $56 billion 13F portfolio (check out other hedge funds owning Trina). Although Trina is well positioned in the industry, the industry itself is still speculative and volatile, as seen by Trina’s 3+ beta, so buyer beware.
The article Dear Trina Solar, I’m Back! – Billionaire Ken Griffin originally appeared on Fool.com and is written by Marshall Hargrave.
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