As anyone in the market for more than a few months know, earnings are all about "expectations" - Trina Solar reported $0.51 EPS which beat the analysts expectations of $0.48. Considering the small P/E ratio this normally would be good enough but considering its "solar" and people want to game earnings, people were hoping for a larger beat - my estimate was they would actually do something in the $0.60 to $0.65 range. Which they did achieve. Huh? You just said they did $0.51.... how did they reach the $0.60-$0.65 range?
Well essentially the management of Trina Solar, as they are apt to do, pulled a surprise on us (in the past they decided to surprise us with adventures such as starting a new polysilicon plant out of the blue, without any heads up), but this time around they decided to change their currency from Chinese Renminbi to US Dollars. Strange. I have no idea why and there was no heads up for this. Here is their explanation:
- Effective January 1, 2008, the Company changed the functional currency of its operating subsidiary, Changzhou Trina Solar Energy Co., Ltd. (''Trina China''), from RMB to US dollars. This change is in accordance with FASB Statement No. 52, "Foreign Currency Translation", and was based on Trina China's significant and sustained shift in conducting a majority of its business activities in US dollars. During the first quarter of 2008, the Company recorded an exchange loss of $4.0 million, which was primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. Such remeasurements are and will continue to be, to the extent we continue to have such non-US denominated obligations, recorded as transaction gains or losses in the consolidated statement of operations.
So what would their EPS of been if they had $0 gain/loss from foreign currency? $16.9M / 25.1M shares = $0.67 EPS
And we would of woken up today to a stock probably trading in the upper $50s as Trina Solar beat earnings expectations of $0.48 by 19 cents. But so it goes, and again - the "masses" will just react to the headline number, which incredibly even with losing $4M in profit due to the currency change STILL beat expectations. That's how strong business is.
Just for reference the 3 main competitors who are most like Trina are Suntech Power (STP), Yingli Green Energy (YGE), and Solarfun Power (SOLF). In the last quarter how did they benefit/gain from foreign currency exchange?
- Suntech Power gained $2.9M due to foreign currency exchange (they earned 33 cents per share, which means 2 of the 33 cents had nothing to do with their business, only foreign currency exchange)
- Yingli Green Energy gained $9.8M due to foreign currency exchange (they earned 25 cents per share, which means 7 of the 25 cents had nothing to do with their business, only foreign currency exchange)
- Solarfun Power gained $2.8M due to foreign currency exchange (they earned 31.5 cents per share, which means 5.5 of the 31.5 cents had nothing to do with their business, only foreign currency exchange)
But again, NONE of these companies should benefit (or lose) from the currency exchange in reality - but just like most US multinationals are "beating estimates" by having a weak dollar and hence they get these currency benefits (which would reverse if the dollar ever rallied for more than a few days), these companies have been able to goose their earnings the same way. Most investors again, do not look past the headline number or dig in and see this - they just go off what Reuters or Briefing.com tells them.
So in summary what I am saying is if Trina Solar had not seen any benefits like their 3 main peers and simply gained NOTHING from currency exchange they would of reported 67 cents and beat the estimate by 19 cents. If they had gained 2-7 cents more from foreign currency exchange (like their closest peers) they would of reported anywhere from 69 cents to 74 cents. My goal was 60 to 65 cents (analysts 48). So while the masses believe this was a small beat, the reality is this was a tremendous beat. So we'll buy more on the panic selling this AM.
Back to Trina Solar earnings - gross margins continue to be best in class, repeating the trick from last quarter [Mar 4: Long Suffering Trina Solar Finally Gets Some Relief] coming in at 25.8%, above my expectations and above Trina's own guidance.
And here is guidance which is also upped from last quarter
For the second quarter of 2008, the Company expects to ship between 43 MW and 45 MW of PV modules and has expectations of total net revenues in the range of $169 million to $177 million. The Company believes gross margin for the second quarter will likely be between 23% and 25% and estimates operating margin to range between 13.5% to 15.5% of total net revenues.
For the full year of 2008 the Company expects total net revenues to be in the range of $770 million to $808 million, with PV module shipments between 200 MW to 210 MW. The Company is expecting gross margin for the year between 23% and 25% and believes operating margin will likely be in the range of 15% to 17% of total net revenues.
That said, I am getting tired of management constantly pulling these surprised out of their back pocket, which is leading to an industry leading LOW P/E ratio since you never know what they are going to pull next. Thankfully their operations are so strong it is counteracting the management "surprises".
I'll be adding on the weak open this AM.
EDIT 9:45 AM - I've moved Trina Solar from a 7% weight to 11% weight. This is a $70 stock masquerading as a $46 dollar stock.
Long Trina Solar in fund and personal account
8 comments:
If I recall, during their first questions about margins, I think one of the guys said they are confident they will meet the guidance(Maybe I misheard the accent?). But what struck me was how simply he said it and how easily it came off. As if it is apparent that it is a total Apple move, and a complete repeat of the previous guidance given that was beaten. Personally I hate to add too much to one position despite my confidence in it down the road. Maybe if it pulls back some more. Good luck!
You now how the market is
In January 08 Apple did its typical underpromise over deliver - I wrote in the blog exactly what they were doing and how in 3 months from now we'd look back and laugh at the guidance as they smash it...which they did. That did not stop the stock from imploding 30% over the coming weeks on 'disappoining guidance' So we took a (big) hit then. Of course Apple has recovered all that and more since.
This is how lemmings work - they don't think; they jump en masse off the cliff. Those who do the homework (a) get smashed along with the lemmings but (b) can take advantage of the stupidity over the long run.
I suppose this stock can be valued at a 10 forward PE ratio the way things are going but its starting to get silly ;)
Such easy money on Trina this morning with oil and every other bloody solar gapping up.
The curreny move should be poitive in the future? I suck at accounting, but going forward they won't be translating dollars earned in ever more expensive RMB.
I dont know if it will be positive or negative -they should be hedging the currency
All I know is there was no reason to do this move - why be the only chinese solar to do this?
All they needed to 2 was put 2 good quarters back to back and you could of had your ENER type run. ENER reported one good quarter but after years of lack of trust in management, the Street wanted to see them repeat that - they did - and the stock goes on for a huge gain. Thats all TSL had to do - they had 1 great Q last time around - the street shrugged it off and said show us one more time since your management always pulls surprises - they did perform operationally but then threw this idiotic move on top of it to destroy the huge beat. If not for the huge valuation discrepency I would be in another solar stock. But at this point its valued as an auto stock. But thats what happens when management constantly "surprises" the Street - this is the 3rd time in 4 quarters they gave us something we did not expect out of the blue. The Street hates uncertainty far more than bad news - so Trina seems locked in with an uncertainty discount... but 40-50% versus peers seems a bit much.
as I see it
good sector, bad [bordering on incompetent] management; fittering away opportunity and money on bad decisions
need to look for a company in this sector with better management
hrs,
if the discount to peers was not so much of a chasm I'd agree
for reference
going into yesterday (before todays swan fall)
forward PE ratios
STP 26
YGE 27
SOLF 24
and (drumroll)
TSL 15
that is using the $3.14 analysts have them at
at the $4.00 I think they will do (based on their own guidance)
11.5
So if TSL was at 20-22 PE and the gulf was say 10-15% I'd chalk that up to management discount. But this is not a gulf, this is like the distance from moon to earth.
So we can either say, thank you management for creating such an opportunity and market dislocation. Or *(@*#@(*#(@ management.
I say both ;)
I would of liked the ENER pop over the next week, cut back the position and then rebuy lower. But now its looking like that pop might half to wait until (drumroll) 2nd half 2008.
Why in the world would they switch to the USD?
I think you're right, though, and am buying here at $45.25.
BD
very peculiar... makes no sense to me at all. maybe mgmt are some rabid currency speculators and know something we don't?
either way, kind of shady. i'll stay away from this one for now. hope it works out for ya though. and we'll tune in next quarter to see what kind of surprise they've got next haha
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