JA Solar (JASO) Hits Third Straight Quarter of Positive Profits

by Ryan Fitzwater, Director of Research, The Oxford Club
StockGrader

Solar module producer JA Solar (Nasdaq: JASO) posted its third straight quarter of positive profits thanks to higher solar demand and decreased competition.

It comes as a surprise to many that solar is becoming a more popular energy source. After years of oversupply that led to falling solar prices (which also put many solar producers out of business), solar demand is picking up.

In the last four years, solar panel prices have dropped over 62%. In 2010 panels sold for $2.01 per watt. Today they sell for $0.76 per watt.

Slipping solar panel prices that made solar a more attractive option pushed many producers to bankruptcy. And those left standing, like JA Solar, are benefiting from the increased demand and inevitable price increase as a "supply squeeze" is taking effect.

Solar panel installations are expected to increase over 29% this year. And by 2015 the industry is expected to install 61 gigawatts, well above the 40 gigawatts installed in 2013.

This increase in demand and prices is already helping JA Solar boost sales. This quarter, revenue jumped 53% over the same period last year to $390.5 million.

The China-based company also raised its outlook for the full year, expecting total cell and module shipments to continue their improved growth. JA Solar previously expected to ship between 2.7 and 2.9 gigawatts for the full year, and now it expects to ship between 2.9 and 3.1 gigawatts.

JA Solar’s CEO, Baofang Jin, sees sustained growth and profitability for the remaining half of the year "due to accelerating activity in China, and continued favorable product and geographic mix."

The company started to turn things around at the end of last year, reporting a profit in the fourth quarter for the first time since the second quarter of 2011. After breaking the negative earnings streak, the company is back on track, posting its third straight quarter of positive EPS at $0.10 per share.

But even with all this positive news, the stock is down over 4% today since the company missed Wall Street’s consensus EPS estimates of $0.21.

Question is... with all this positive demand and improved panel prices, is today’s minor earnings miss and subsequent drop in share price equal a great opportunity for you to pick up shares on the cheap?

Let’s see how things shake out from a fundamental perspective with our Investment U Fundamental Factor Test:

Earnings-per-Share (EPS) Growth: Getting out of the red and into the black is no easy feat. In the second quarter of last year, JA Solar posted an EPS loss of $0.58. As we already noted above, the company posted a positive EPS of $0.10 share this quarter, a fantastic turnaround.

Price-to-Earnings (P/E) Ratio: JA Solar’s forward P/E is a healthy 11.03, while the solar industry average is flying high at 54.87. JA Solar is almost five times cheaper than its peers on a forward earnings basis.

Debt-to-Equity JA Solar’s debt-to-equity of 69.20% is over three times lower than the industry average of 253.30%. A really positive sign. If the rest of the industry is this overleveraged, JA Solar could see a few more competitors drop out. That would put a smile on management’s face.

 Free Cash Flow Per Share Growth: Chinese companies get a little funky with their free-cash figures (i.e. they tend to report free cash flow on an annual and semi-annual basis and skip quarters at times). So this go-round we will focus on cash from operations, strictly comparing this quarter to the previous quarter of this year. Operating cash flow was negative $13.5 million this quarter compared to a positive operating cash flow of $32 million in the first quarter of 2014. It missed the mark here.

Profit Margins A bounce-back check mark here. The solar industry is averaging profit margins of -9.46%, while JA Solar is on the positive side, with margins of 3.63%.

 Return on Equity Currently JA Solar is getting a -4.69% ROE, but the industry is worse off with an average ROE of -27.68%. JA Solar’s ROE should improve if it continues to post positive earnings. And as long as it is beating the competition, we have no problem passing them on this metric as well.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

A: Strong Buy (Hits five or more key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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