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Understanding Trina Solar’s Valuation Compared to Peers: Who’s Trading at a Discount?

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Relative valuation

A company’s valuation helps us compare its value relative to peer values. Specifically, the enterprise-value-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio represents the cost of the common stock of a company. A higher EV-to-EBITDA (enterprise value-to-EBITDA) ratio thus implies that the company in question is overvalued compared to peers.

EV-to-EBITDA is not impacted by a company’s capital structure. As the upstream solar industry is capital intensive, incumbent players raise capital through a variety of sources to fund their expansion plans. As a result, the capital structure could vary significantly among them. The EV-to-EBITDA ratio is thus useful in comparing the value of one company to that of another.

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Among major upstream solar (TAN) companies, First Solar (FSLR) has lowest EV-to-EBITDA ratio of 5.63x for the fiscal year 2016, which is closely followed by Trina Solar (TSL) at 6.00x. Analysts expect that Canadian Solar’s (CSIQ) EV-to-EBITDA ratio will be 8.10x for fiscal 2016, as compared to SunPower’s (SPWR) ratio of 7.41x. However, SunEdison’s (SUNEQ) EV-to-EBITDA ratio is anticipated to be highest among Trina Solar’s peers, with a value of around 49.12x in fiscal 2016.

Notably, SunEdison filed for Chapter 11 bankruptcy protection on April 21, 2016.

Analyst ratings of Trina Solar

Notably, four out of 11 analysts covering Trina Solar have rated the stock a “buy.” Six analysts have rated the stock a “hold,” and one analyst recommends a “sell” for the stock.

According to analyst estimates, the consensus 12-month target price of Trina Solar was $9.01 as of June 12, 2016. If we note that the stock’s closing price was $7.20 on June 10, 2016, we see that the stock has a return potential of about 25%, according to analyst estimates.

Notable recommendations

Among the 11 firms covering the Trina Solar’s stock, Morgan Stanley has dubbed the stock “equal weight,” with a price target of $11.1 assigned on May 26, 2016. However, Goldman Sachs (GS) and Credit Suisse maintain a “neutral” rating on the stock, with a price target of $8.0 and $12.0, respectively, assigned on May 26, 2016.

For related analysis, check out Market Realist’s Energy and Power page.

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