1 Solar Stock for Your Watchlist

Last month, I wrote about JA Solar's (Nasdaq: JASO  ) poor showing in the just-concluded quarter. The dismal performance came as no surprise considering the weakness that the solar industry is currently experiencing due to subsidy cuts in important markets like Germany and Italy. Now, I will place the company under the lens and examine whether it deserves a place in my portfolio in the long run.

Positive facts
Though JA Solar swung to a loss after five successive quarters of profitability, I am not going to base my judgment on just one poor showing, especially when its compounded annual revenue growth over the past three years stands at an impressive 48%. Moreover, the company's revenue has almost doubled on an LTM basis, which gives me reason to believe in its fundamentals.

The last quarter may well be a flash in the pan as declining prices of solar products and writedown of inventories led to a decline in earnings. However, even in such tough times, the company did well to post a 29% jump in shipments.

Furthermore, JA Solar provided hope of a revival through its expansionary drive. The company is pushing into Japan, Australia, the U.S., Canada, and India. Most important, the company is also expanding its base in China, where it is setting up a factory with a production capacity of 3,000 megawatts. This particular move will help the company do well, as the solar industry is rapidly growing in China and the government plans to grant 50% subsidies to solar products over the next two years.

Problematic inventories
Accumulation of inventories is not an uncommon phenomenon in this industry, particularly after the slowdown. However, let's take a look at how JA Solar stands against it peers in this important spot, which determines how well a company is selling its products.

Company

Inventory Turnover Ratio

Change in Inventory (Year Over Year)

JA Solar 9.9 times 133%
JinkoSolar (NYSE: JKS  ) 7.2 times 136%
ReneSola (NYSE: SOL  ) 5.9 times (1%)
Yingli Green Energy (NYSE: YGE  ) 4.9 times 44%

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

Evidently, there is a glut of inventories at JA Solar. However, it sports the highest inventory turnover at almost 10 times, and hopefully the company will clear the traffic lodged in its warehouse once the industry starts to look up and the expansion drive bears fruit.

Value
Let's take a look at how the company is valued as compared with its peers.

Company

TEV/EBITDA (TTM)

Trailing P/E (TTM)

Forward P/E

JA Solar 2.70 4.17 2.48
JinkoSolar 3.25 2.93 2.92
ReneSola 1.78 2.00 1.64
Yingli Green Energy 3.94 4.25 4.48

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

Solar stocks are selling at distressed P/Es right now, and JA Solar is comparatively cheap even against its bargain-bin Chinese peers. One reason for these low multiples could be that the market doesn't expect much out of them, based on the belief that there would be lower acceptability for solar power. However, considering the policies that countries like China, and, to a more limited extent, the U.S., are adopting, I would say solar is here to stay. We may not be getting these stocks so cheaply in the future. To me, it makes sense to move into them when they are trading at these levels. However, you need to separate the wheat from the chaff. At the moment, JA Solar certainly isn't chaff.

The Foolish takeaway
Fundamentally, the company seems to be on the right track, but a hiccup in the form of wide losses in the previous quarter may discourage investors from jumping on the stock. JA Solar is currently engulfed in a haze due to the economic slowdown and has withdrawn its guidance for the rest of the year. If you are a daredevil investor, then you might want to bring the company onboard your portfolio and wait for it to do well. If you're more cautious, there's always the option of adding it to My Watchlist and waiting for the smoke around JA Solar to clear.

Fool contributor Harsh Chauhan does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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