Is JA Solar Holdings Earning Its Keep?

Margins matter. The more JA Solar Holdings (Nasdaq: JASO  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons with sector peers and competitors, and any trend that may tell me how strong JA Solar's competitive position could be.

Here's the current margin snapshot for JA Solar and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

JA Solar Holdings 21.7% 16.8% 14.9%
Trina Solar (NYSE: TSL  ) 31.5% 22.5% 16.8%
China Sunergy (Nasdaq: CSUN  ) 17.0% 10.7% 7.4%
Suntech Power Holdings (NYSE: STP  ) 19.3% 10.8% (3.0%)

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where JA Solar has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and the last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect and what to watch.

Here's the margin picture for JA Solar Holdings over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 24.7% and averaged 19.9%. Operating margin peaked at 18.8% and averaged 13.5%. Net margin peaked at 18.4% and averaged 10.7%.
  • TTM gross margin is 21.7%, 180 basis points better than the five-year average. TTM operating margin is 16.8%, 330 basis points better than the five-year average. TTM net margin is 14.9%, 420 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, JA Solar looks to be doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Have an opinion on the margins at JA Solar Holdings? Let us know in the comments section below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings. He is a co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2011, at 1:03 PM, chrisceeaustin wrote:

    Margins for solar cell and module makers are affected by things that are out of their control -- like the cost of poly, level of subsidies. The things they are in control of are increasing economies of scale and optimizing efficiencies in the manufacturing process. JA Solar is doing great considering the recent high prices of polysilicon, its continuing expansion and diversification and the lowering of subsidies. It will likely increase capacity by 50% this year but also introduce a new line, add wafer capacity. The first and last items will increase margins, along with lower polysilicon prices. The adding of their Maple solar cells and diversification into the module business likely decrease margin. Volume, however, will likely increase by a wicked amount, and 90% of current capacity is already sold for 2011.

  • Report this Comment On February 27, 2011, at 3:26 PM, TreeDave wrote:

    Hi Seth,

    I was not able to find an email address to email you this question so I am posting it here. I hope you don't mind.

    This morning I found a note posted in the China Daily website (which I translated automatically using Google's translate function) on a supposedly very huge contract signed by JA Solar yesterday.

    The article claims that JASO "signed a strategic investment with the Hefei Government cooperation... to build the world's largest 3GW of solar integrated production base".

    The note is very recent, less than 24 hrs, and again, it is a translation, so I am not sure if this is for real. Do you know anything about it?

    Thanks

    http://www.chinadaily.com.cn/dfpd/anhui/2011-02-27/content_1...

  • Report this Comment On February 28, 2011, at 12:23 AM, deagertm wrote:

    The real margin is about 25% greater than you think. JASO is selling at 20% below spot. JASO has contracts to sell their product. When demand slows or drops the the spot price will drop but JASO will still be at or near the same margin and JASO is still expanding by about 50% per year.

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