Trina Solar Limited (NYSE:TSL) had a notably strong third quarter, as it posted hefty revenue and earnings increases. The company beat analyst expectations, but the stock suffered from the macro-economic news of eurozone debt problems. Investors also remain skittish about the political climate surrounding the solar industry.

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First, the Numbers
The company earned $82.87 million or $1.08 per diluted ADS, versus $39.76 million or 64 cents last year's Q3. Revenue was $508.3 million compared to $249.8 million in the year-ago quarter. Gross margin was 31.4%, compared to 28.5% in 2009's third quarter. The company increased shipments of its photovoltaic solar products, or modules, by 137% year-over-year, and by 30% sequentially. The stock was sent 7% lower in trading on news of its report, while Chinese solar stock LDK Holdings (NYSE:LDK) was beaten down by 6.5%. Most solar stocks have trended lower by 10 to 20% in the last month.

The Street's Concerns
Three things concern observers about Trina and other solar stocks: One, margins; two, governments' roles; and three, expansion potential. Investors can add a fourth worry to this Wall Street wall, that of the euro debt problem or crisis, depending on how that unfolds. Trina's gross margin, which was up from the year-ago quarter, was nevertheless down sequentially. Q2 saw gross margins of 32.1%, so the market didn't care for the impressive-looking but lower 31.4% turned in by Trina this quarter. Just for some context, Trina's TTM gross margin is 31.7%, compared to 22.4% for JA Solar Holdings (Nasdaq:JASO) and 19.3% for Suntech Power Holdings (NYSE:STP). Its net margin is 14.1%, compared to JA's 12.3% and Suntech's negative 3%.

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Concerns about government policies regarding solar remain a constant when looking at the industry. The German government is making noise about possibly capping its subsidies, while the French are considering both a cap on installations as well as a further 10% cut in its subsidies. A solar industry with lower government subsidies would obviously have very different metrics.

While Trina has some capacity for expansion, its guidance was read as having a limited upside next year due to the possibilities of dampened demand. The Street read the guidance as a softer fourth quarter this year which will possibly carry over into 2011.

Trina Solar's Prospects
The risks of declining margins, the governments' role and the concerns about expansion potential are all legitimate risks for investors to keep in mind about solar. Also, the euro debt - again, we hear the term contagion - has the possibility of affecting everything economic, not just solar.


Bottom Line
With those considerable concerns in mind, two realistic ways of looking at Trina solar emerge: One, solar isn't a conservative investment, and two, all solar stocks aren't alike. As we see from a simple comparison of the margins, the performance of Trina has some pluses. It is a low-cost and relatively efficient producer in its industry. There are other well-performing solar energy companies, such as Canadian Solar (Nasdaq:CSIQ), which had a stellar quarter and has dramatically improved its performance. Trina's future, despite its dampened guidance, is a shining one. With its stock languishing and its P/E in the mid- or upper-single digits depending on earnings projections, it is a strong growth prospect and an intriguing investment even though it carries real risk. (For more, see our Spotlight On The Solar Industry.)

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