Is JA Solar a Growth Trap?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up is JA Solar (Nasdaq: JASO  ) , a Chinese maker of solar equipment that recently announced 500 megawatts worth of orders, or enough to supply power to upwards of 100,000 homes here in the U.S.

Deals like these help explain why the stock has rallied more than 70% over the past year. The S&P 500 is up less than 7% over the same period. Can the rally continue? Sure, if growth also continues. Let's get right to the numbers.

Foolish facts

Metric

JA Solar

CAPS stars (out of 5)

****

Total ratings

1,478

Percent bulls

95.3%

Percent bears

4.7%

Bullish pitches

176 out of 191

Highest rated peers

Yingli Green Energy (NYSE: YGE  ) , Suntech Power (NYSE: STP  ) , SunPower (Nasdaq: SPWRA  )

Data current as of Sept. 18.

Fools like JA Solar, and I understand why. Solar is important technology and the government is offering incentives to those consumers who want to invest. Businesses, too, can qualify for tax credits for using manufacturing facilities for clean energy production.

Incentives lead to demand. Demand leads to growth. And growth, at least one Fool says, leads to a cheap valuation of JA Solar shares.

"Just went over the numbers, thinking I might sell (real world) after the 10% bump today. But: Translate their 1.35GW guidance for this year into Q3 and Q4 earnings, and they are worth closer to $15 than $10 by February. Throw in that enormous new contract for 2011 and a great new module due out this year, I bet they hit a new high within two years. That's a triple or better at $7 and change," wrote Foolish investor SydParrot recently.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

787.5%

Not material

156.9%

Revenue growth

84%

(30.8%)

102.6%

Gross margin

21.3%

12.7%

18.2%

Receivables growth

340.5%

(4.4%)

563%

Shares outstanding

162.7 million

169 million

168 million

Source: Capital IQ, a division of Standard & Poor's.

There's plenty to like in this table. Let's review:

  • First, while revenue growth is inconsistent, this is what we've come to expect in emerging industries and emerging markets. What's important is the acceleration. When JA Solar grows, it grows.
  • I'm also encouraged by the turnaround in receivables. This is such a fickle industry that management needs to be smart about inventory management.
  • Finally, look at the shares outstanding. That management is repurchasing shares in a time of growth says they're either (a) crazy, or (b) well-prepared. Given history and the stock's record of outperformance, I'm going with "b."

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Canadian Solar (Nasdaq: CSIQ  )

Not material

JA Solar

50.3%

Solarfun Power (Nasdaq: SOLF  )

134.6%

SunPower

2.7%

SunTech Power

(87.6%)

Trina Solar (NYSE: TSL  )

117.1%

Yingli Green Energy

Not available

Sources: Capital IQ. Data current as of Sept. 18.

Unfortunately, you can't see what's most interesting about this table. While JA, Solarfun and Trina have all produced superior income growth over the past three years, only Solarfun and Trina have produced positive stock returns.

JA Solar is down more than 47% over the same period. Read that again. Income is up more than 50% in each of the past three years, yet the stock is down close to 50%. And with a PEG ratio of 0.38, is valued at a sliver of its estimated long-term growth rate.

Grade: Sustainable
I'm a believer in JA Solar Holdings at present levels, in part because of the valuation but also because I'm convinced there's no quick end to the incentives that will fuel demand for new solar cells.

Now it's your turn to weigh in. Do you like JA Solar at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Suntech Power is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On September 21, 2010, at 9:14 PM, nonzerosum wrote:

    Solar is at an inflection point for major growth. That's why you're seeing these huge revenue increases at JASO and its buddies (see my CAPS). Why? Because solar is becoming economical _without_ subsidies if you do a marginal analysis rather than calculate ROI based on average domestic/wholesale electricity. Here are two examples where it makes sense at the margins when cost is $1.50 a watt:

    1) Locations with high costs of electricity and good sun, e.g. Hawaii big island or Israel.

    2) Peak power demand situations, e.g. Austin TX.

    Ken Fisher disagrees, saying fracking will kill solar. I'd like to hear what others think.

  • Report this Comment On September 22, 2010, at 1:21 AM, sailrick wrote:

    SOLF

    PEG ratio 0.38

    Forward PE 8.2 about half the S&P PE, if I'm not mistaken.

    And this is a growth stock, like you said

    Estimated sales growth next year 17%

    Estimated growth rate next 5 years 20%

    Of course other solars have low valuations as well.

    TSL forward PE 10.9 PEG 0.5

    JASO fwrd PE 11.7 PEG 0.38

    SOLR frwd PE 12 PEG 0.16

    JKS fwrd PE 7.9 PEG 0.44

    Which is why I have three of these stocks, including SOLF.

    I like to spread the risk over several stocks, in an emerging sector like solar.

    =======================================

    Fracking is not going to kill solar, that is absurd.

    Natural gas, being the cleanest fossil fuel can certainly help transition to a cleaner energy future.

    One example would be co-firing gas with solar thermal. The solar aspect covers the vast majority of the peak demand, with small amounts of gas for the evening demand. The NREL pilot plants in the Mojave Desert are set up that way and work well. (Those are without molten salt heat storage.)

    But, its fossil fuels that will be killed, in time. Well, phased out anyway.

    Fracking is just another of the desperate ways that humans are now seeking fossil fuels as we move toward peak oil. They are all more environmentally risky, and they are usually more expensive.

    Hydraulic facturing for gas is apparently poisoning water tables and aquifers.

    Deep sea oil drilling. We've seen an example of its risks and costs.

    Drilling for oil in the Arctic Sea where an oil spill will not break down like it will in warm water. Imagine trying to stop an undersea gusher, like BP had, in the Arctic Sea in winter, under a frozen sea.

    This is a fragile but very important ecosystem.

    Alberta Tar Sands the most destructive project on earth with about 3.5 times the CO2 emissions of normal oil projects. It has to have NG for the process, so you are using a cleaner fossil fuel to get a dirtier fossil fuel. It uses up to 5 gallons of water for every gallon of oil produced, and is ruining the Athabascan watershed. This is where most Candadian oil imported by the U.S. comes from.

    Mountain top removal for coal has blown the tops off about 700 mountains in Appalachia, bulldozing the rubble into adjacent valleys, destroying the streams that run through those valleys.

    Solar is already competitive in more markets than nonzerosum mentioned. Particularly sunny, high priced markets. Southern California for example, at least during peak demand, which is when solar is at its best. Solar thermal can cover much of the demand in the evening.

    Its pretty obvious that the costs of renewables will only go down, while the costs of fossil fuels will only go up.

    Now if we got smart, and starting accounting for the real costs of fossil fuels, things would look much different.

    In the U.S., fossil fuels get TWICE as much in subsidies and tax credits as renewables get. And corn ethanol, of all things, gets a good chunk of the help for renewables.

    Globally, fossil fuels get 12 times as much govt help as renewables do. - IEA study said fossil fuels got over $500 billion last year, while renewables got $46 billion, globally.

    So lets take the money applied to fossil fuels and do something smart with it. Why is the industry with the biggest profits in history, still subsidized? Oil has been subsidized non stop since 1918. Coal since 1932.

    And then there's the hundreds of billions in externalized costs each year in the U.S., from fossil fuels. Environmental damage, health damage, infrastructure damage from acid rain, military costs of protecting oil. This cost is always there, regardless of whether we are currently fighting a war in Iraq for oil. The current war in Iraq will end up costing $1.8 trillion. And thousands of lives.

    Yes, lives are part of the cost that's externalized.

    Status quo resource policy - Privatize the profits and socialize the costs.

    Better idea- Tax carbon. Return most of the money to the people directly. Use some to help renewable energy growth and research.

    You can even get an advance on your share, to pay for solar installation, making your house more energy efficient etc.

    There is a bill being submitted to do just that. I forget if its the House or Senate.

    You could think of carbon tax as a fee, for using the atmosphere and water as a dump.

    Oh, I almost forgot the trade deficit, mostly for imported oil. It was $700 billion for one recent year.

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