Good morning to all. So, I have spent the last couple hours looking for something to play – Overnight, Short, Buy, Midterm, Two Day…anything. I really just don’t see any attractive opportunities. At least ones that fill all of my criteria, and while I know it is my job to provide you with trades, I do not like to force them. When I do, it doesn’t turn out well for you and me. So, what I am going to do today is an update and overview on all of Longterm Ratings. Finally, I will be doing a new Longterm Rating on Trina Solar (TSL) and Green Mountain Coffee Roasters (GMCR). We are moving away from the Longterm Positions to the Ratings. This is actually a much more effective approach because it will allow us to set very succinct buying ranges and selling ranges that we can follow until these companies hit this level. TSL and GMCR are two stocks we had in our Longterm Virtual Portfolio, so I am going to update my DCF and stories and set price targets, buy/sell ranges for them. I know that this is not actionable information today, but I will stress that a diversified virtual portfolio between short, medium, and longterm trades is important.
If you did not see it yesterday, our latest Longterm Rating in Frontier Communications Inc. (FTR) is rated as a Buy with a price target of $16, which is a 100% increase in price from yesterday.
Longterm Ratings Virtual Portfolio:
Buys –
1. Frontier Communications (FTR):
Buy below $13.50. Sell above $18. Fair value estimate is $16. Current price is $8.07. Risk is Medium-High.
Holds –
1. Align Technology (ALGN):
Buy below $22. Sell above $32. Fair value estimate is $28.50. Current price is $22.26. Risk is Medium.
2. Cree Inc. (CREE):
Buy below $44. Sell above $61. Fair value estimate is $56. Current price is $52.80. Risk is Medium.
3. First Solar (FSLR):
Buy below $130. Sell above $198. Fair value estimate is $174. Current price is $148.50. Risk is Low-Medium.
4. The Ryland Group (RYL):
Buy below $15.25. Sell above $22. Fair value estimate is $20. Current price is $17.75. Risk is Medium-High.
5. Skechers Inc. (SKX):
Buy below $22. Sell above $32. Fair value estimate is $28.50. Current price is $22.25. Risk is Medium.
Longterm Rating – Trina Solar
Profile: Trina Solar Ltd. is a photovoltaic module designer, developer, manufacturer, and seller based in Changzhou, China. The company, founded in 1997, produces monocrystalline and multicrystalline PV modules that produce clean and reliable solar energy. The company sells its products to distributors, wholesalers, power plant developers, and PV system integrators. Its PV cells are used for residential, commercial, industrial, and utility applications. The company has partners/subsidiaries 
throughout Asia, Europe, and North America. The majority of Trina’s sales are in Germany, Spain, Italy, and Benelux.
throughout Asia, Europe, and North America. The majority of Trina’s sales are in Germany, Spain, Italy, and Benelux.Thesis
2010 has been a very god year for Trina Solar Ltd. (TSL). The company is set to more than double its earnings, revenue, and operating income from 2009. The company is positioning itself well in China, the USA, and moving out of Europe. Despite its successes, questions still remain about solar energy and the solar sector. Questions of future tariff cuts, demand wane in Europe, the considerable competition from a large number of companies, and others remain. Solar energy, though, is a commodities industry. The company that can offer the most efficiency to cost of production will be the leader. One such company has put itself in the mix as the leader with its strong resume of efficiency and cost effective production.
Trina has been able to reduce its production costs considerably with the ability to now turn its raw silicon into a solar panel for only $1.05 per watt, which is the lowest of all silicon competitors. It does sit behind the less than $0.80 per watt it costs First Solar, but the company uses a different material for its solar panels. Additionally, the company operates a solar panel with over 18% efficiency. First Solar only achieves around 11-12% efficiency while silicon cost competitor Yingli (produces around $1.10 per watt) produces a panel with 19% efficiency. This ability to produce a highly efficient, marketable good with the lowest cost in silicon panels allows Trina to continue to produce significant earnings and margins over 30%. In the highly competitive solar industry with similar products, the two things that matter most are costs of production and efficiency of sells. Trina is a leader in both.
Trina faces stiff competition in the solar energy market. There are over 35 public solar energy companies on the NYSE that are competition with Trina. Most of these companies are small and do not compete on the same level as Trina. For example, at the end of 2009, Trina Solar, under the California Solar Initiative (CSI), had less than 5% of the market share. With a focus on diversifying into America (the company has signed its fourth agreement with a US distributor as of June 2010), the company has quickly taken the place of many other more expensive, less efficient companies and gained 16% of the market share. While the company does not have a niche in the industry due to similar products. The solar industry is basically a commodities market. The cheapest company with the best product is the winner, and that has become a horse race between a handful of the solar giants, which has allowed Trina to gain a small economic moat.The company, additionally, is working with SERIS to produce a newer, more efficient panel to continue to operate as the lowest cost to highest efficiency panel producer.
The company also faces a major crisis in Europe with Euro concerns and loss of demand in the leading German countries. In 2009, the company did 90% of its business in the Germany, Spain, Benelux region. Yet, the company has realized that there is a great need for them to diversify away from the European region and move towards China and the USA. The company plans to transport 100 MW of energy to the USA in 2010 and improve that to 150 MW by 2011. The movement into the USA, China, and other emerging solar markets will help Trina to battle the Euro woes in Europe and better diversify itself for the future. Additionally, the company has used subsidies from Germany, the current European leader for solar panel production, and other European nations for a long amount of time to keep prices even lower. Now more than ever, with Germany planning 
to continually reduce its feed-in tariffs (FITs), it is crucial for solar companies to be able to produce the most inexpensive solar panels, a la Trina.
to continually reduce its feed-in tariffs (FITs), it is crucial for solar companies to be able to produce the most inexpensive solar panels, a la Trina.Despite these concerns, the global demand for solar energy should rise from 10 gigawatts to 12.7 gigawatts on the year as economies start to recover and the price of oil remains high. The rise in demand of solar continues to increase each year. In 2008, the demand was just 6 GW and was just 1.7 GW in 2006. This industry is growing very rapidly, and solar shares are extremely cheap compared to where these could go in the next five years.
Taking a look at the financial side of things can help us paint an even better picture of Trina Solar.
On the positive side, the company has improved their current ratio to 2.83%. We tend to worry about companies that have a current ratio below 2% because of liquidity issues. They have to many liabilities. The company is less than First Solar at 5% and JA Solar at 5%. Yet, the company is above Yingli, which is at 1%. The company could use to improve its current ratio by decreasing its liabilities, yet this would require the company take on changes in working capital that would affect free cash flow. The company’s ability to deal with liquidity well will be necessary for the company to continue to have a healthy balance sheet and cash flow statement.
One of the most outstanding aspects of the company is that its margins are very strong. The company has a gross margin at 31.2% in the TTM, which has improved from 23.1 in 2005. The company has an industry leading gross margin for silicon producers. YGE comes in at 27%, and JASO comes in at 21%. Not only is the company improved its gross margin, but they are also improving operating margins, which further highlights the company’s ability to keep costs low. The company’s operating margin is over 21%. Yingli and JA only come in at 10% an 15%, respectively. First Solar still leads at 30%. Seeing strong margins that are continuing to get better is a direct reflection on strong management and careful attention to costs and efficiency.
Another positive reflection for management is Return on Equity and Return on Invested Capital. The company has ROE at 24%, which is very solid. A number above 12% shows a good return on equity. The company has seen the number dip from 30% in 2009, but it is still very significant. One place of worry is that the company saw its ROIC dip in the TTM. The company 
had an ROIC at 28% in 2009, and it has dropped to 22%. Now 22% is a ridiculous ROIC, but anytime we see a drop in ROIC it does worry me because its a sign of a company that will be returning less profits to shareholders. Since the number is still so high, it skews this qualm, but it is still something to watch.
had an ROIC at 28% in 2009, and it has dropped to 22%. Now 22% is a ridiculous ROIC, but anytime we see a drop in ROIC it does worry me because its a sign of a company that will be returning less profits to shareholders. Since the number is still so high, it skews this qualm, but it is still something to watch.One of the biggest positives for Trina is that in 2008 to present the company has continued to increase its Free Cash Flow. A company with FCF is a company in which we want to invest. It shows a company that has money to do R&D without taking on liabilities. It can help liquidity, and it means the company is seeing more cash coming in than is going out. It is the essential oxygen of a company. The company improved its FCF margin in the latest quarter to 17%. A company above 10% has a strong FCF margin as part of sales, and it shows strong health.
Finally, Trina Solar has a very low P/E ratio. Even despite its recent successes, the company still has a P/E ratio at 11.67. The industry average is near 20. So, the company with any strong earnings reports will continue to see heavy doses of buying and share price increases.
Trina Solar is in a very good position and appears to be the most attractive solar silicon panel producer.
Valuation
The Oxen Group’s fair value estimate for Trina Solar is $38.50 per share based on a discounted cash-flow analysis. The company has seen incredible growth in its operating income in the past five years, and there is really no worry that the industry cannot continue to grow as demand continues to grow. Given the development of new markets, the company’s ability to offer the cheapest product and second-most efficient, and continued growth of capacity of MW the company can produce per year, the company is continuing to offer growth in its income. Estimated available free cash flow starts at $110 million for this year, which is somewhat cautious compared to estimates to help with the Euro problems. The company, however, should continue to grow those numbers with an increasing number of MW they can produce and new markets.
The stock is a Buy below $27 and Sell above $45.
Risk
Risk is medium with Trina Solar. The company, in the last five years, has been able to definitely develop itself as a leader, but it is in a commodities industry. If another company can find a way to beat out Trina for watt to raw silicon production prices, then Trina will not have as much of an upper hand. Questions about the Euro and subsidies remain in the short term, but they could create long term issues for solar companies if they fall out of favor due to rising prices. Upturn in the global economy would do wonders for solar energy.
Good Investing,
David Ristau
