Does JA Solar Belong in Your Portfolio?

Source: JA Solar


Surging over 120% in the past twelve months, solar stocks have been on a tremendous run. Some believe that a correction is imminent, while others simply believe that share prices have reached a plateau. Whether either of these situations plays out, or the sector continues to outperform the rest of the market, investing in well-run companies will benefit shareholders in the long run. Does JA Solar (NASDAQ: JASO  ) belong in this category? Before making a decision, let's take a look at some things to look for in the company's fourth quarter earnings release.

JA in the U.K.
Operating in the U.K. may not seem like the most obvious of choices for solar companies, but JA Solar is developing a relationship with British Solar Renewables. In 2013, JA Solar supplied the U.K.-based developer of large-scale utility projects with 30 MW of modules for four different projects. This week, JA Solar announced further evidence of the successful relationship -- the company will supply British Solar Renewables with 7.8 MW of modules for a project in the southwest of the U.K. JA Solar's recent gains in the U.K. market give it an advantage in gaining greater market share, but it is not without oncoming threats.

JA Solar's deal pales in comparison to the four projects in which SunEdison (NYSE: SUNE  ) is involved. Totaling 56 MW, the projects are expected to be operational by the end of March. Although this is SunEdison's first foray into the U.K. market, the company sees great potential here. According to Jose Perez, SunEdison's president of Europe, Middle East, Africa, and Latin America, "We view the United Kingdom as a high-growth market for solar and for our company." Recognizing the potential in the U.K., Trina Solar (NYSE: TSL  )  represents another threat to JA Solar's success. CCL Components, headquartered in Glasgow, will now offer Trina's 250W and 260W monocrystalline Honey modules. JA Solar will surely see more threats arise, for NPD Solarbuzz forecasts 2.2 GW of PV capacity to be added in the U.K. in 2014.

Focusing on financials
The company's performance over the past four quarters shows signs of improvement, but whether this improvement will be sustained remains to be seen. Despite a bump in the road in Q2 2013, revenue has been rising. This has been driven more by the company's attempts to emphasize sales of PV modules and less on solar cells. In 2011, modules comprised just 25% of sales, while in the first nine months of 2013, modules comprised 58% of sales. Both gross and operating margins have been steadily improving; however, the company has not shown a profit as of yet, and although the company's net loss declined drastically year over year, it did rise quarter over quarter.

 

   Net Revenue         ($mm)

Gross Margin

Operating Margin

Net loss ($mm)

Q3 2013

287.3

11.3%

- 5.2%

$37.1

Q2 2013

258.9

8.1%

- 5.4%

$21.6

Q1 2013

274.0

6%

- 13.9%

$33.3

Q4 2012

272.9

- 4.6%

- 80.7%

$102.4

On the horizon
Recently, JA Solar announced that it had achieved 19% conversion efficiency in its multi-Si cells -- cells which can be used in PV modules for both residential and commercial applications. Granted, this isn't an innovation that is going to greatly set the company apart from its peers, but the company believes that it will give it an edge. For example, Trina Solar's multi-Si cells all produce less than 16% efficiency, while SunEdison's multi-Si cells produce 15% or less efficiency. Yong Liu, JA Solar's chief operating officer, said that the cells' "superior power generation per unit of area and lower installation cost per watt will deliver significant value to customers." Mass production of the cells and integration into modules is not expected until the second half of 2014, so the impact remains to be seen.

Foolish final thoughts
Navigating the constantly changing energy landscape is no easy task -- especially when it comes to the solar industry. There are some signs that JA Solar, one of the solar industry's leaders, is on the right track. Improving margins and revenue are certainly important, but the company's volatile net losses, and the fact that it is still unprofitable give me pause. For now, I'd recommend keeping this one on the watchlist. There are too many other choices out there that offer viable theses for investment.

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  • Report this Comment On March 07, 2014, at 1:12 PM, stockbutterfly wrote:

    The stockbutterfly thinks JASO is a sweet smelling stock. I think its going to do a meltup just like TSL and JKS which went up 20%+ after they reported. JASO had a disadvantage in that they were a cell focussed company that now knows it has to be a module maker and power project builder. Compared to the others they have further to transition which is why profitability is going to be slower to develop. The real beauty of a company who's origins are in cell production though is their R&D, they are clearly technology leaders in China. The other thing I like is the stock hasn't appreciated as much in the last year. The stockbutterfly has TSL and JASO as my two top performing larger solar stocks this year and FSLR as my tanker (it's a technology laggard).

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