How JA Solar Hopes to Get Through China's Solar Shakeout

Next Monday, JA Solar (NASDAQ: JASO) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

The Chinese solar industry has suffered from terrible market conditions for years, and JA Solar has had a lot of trouble in its efforts to make profits from the solar business. Lately, defaults from other companies in the industry have raised concerns about whether a long-awaited shakeout is finally here. Let's take an early look at what's been happening with JA Solar over the past quarter and what we're likely to see in its quarterly report.

Stats on JA Solar

Source: Yahoo! Finance.

Will JA Solar survive a shakedown in Chinese solar?
Analysts have had mixed views on JA Solar's earnings estimates lately, although they all involve plenty of red ink. Consensus estimates for the first quarter have seen loss projections widen by $0.14 per share, and although analysts have narrowed their full-year 2013 loss estimates, 2014 now looks worse by nearly $0.50 per share in earnings. The stock has been volatile in recent months, with the net effect being a small 2% gain since mid-February.

The main problem with JA Solar is that it hasn't been able to earn enough revenue to make a profit even before considering operational costs. With negative gross margins in the fourth quarter, the company has essentially been giving its products away in a manner that's clearly unsustainable in the long run.

But at least so far, the company has avoided the fate that Suntech Power and LDK Solar (NYSE: LDK) have faced, as Suntech defaulted on its bond obligations earlier this year, while LDK ended up making a partial default that involved having to settle with bondholders. Just today, JA Solar announced that it had repaid $119 million to repay principal and interest on its convertible notes that matured yesterday, noting that it was committed to keep paying off all its obligations in timely fashion.

If JA Solar can only get through this tough period, better times might be around the corner. U.S. giant SunPower (SPWR 5.85%) boosted its guidance yesterday for the remainder of the year, sending both its shares and those of JA Solar and its Chinese rivals higher. First Solar's (FSLR 2.12%) positive guidance from last month further excited industry investors, as it's becoming increasingly clear that solar continues to move toward economic viability even with the reduced subsidies that governments have provided lately. Yet SunPower has the advantage of industry-leading module efficiency, while First Solar has done an exemplary job of scoring large-scale projects and the heightened profit potential available from them.

In JA Solar's report, watch for the company to describe how it plans to find a lucrative strategy similar to the specialties where First Solar and SunPower have found success. Unless it can take advantage of struggling competitors to boost its operating results, however, JA Solar might end up joining other struggling players in the space.

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