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JA Solar: Bull Outlook at Odds With EPS Miss

JA Solar reports revenues that exceed the Street and expects bullish demand in solar, but its earnings received a mixed reaction.

(JA Solar earnings story updated with additional commentary, trading reaction)



) Over the past few quarters,

JA Solar


has been one of the solar sector's biggest earnings season outperforming stocks.

Not anymore.

JA Solar beat the Street on revenue in its second quarter earnings by a comfortable margin, reporting $351 million in sales, but the revenue beat was lost amid earnings charges that resulted in a headline miss, and marginal improvement in gross margin that may have been disappointed higher expectations for JA Solar headed into the second quarter earnings.

The revenue beat for JA Solar was material, with the Street consensus call at $304 million.

However, there had been expectation of a huge sales quarter for JA Solar with the demand pull-in ahead of the German feed-in tariff cuts.

JA Solar reported two earnings charges that caused a 9 cent hit to GAAP earnings, including a charge related to the problems faced by a polysilicon vendor,

Shunda Holdings


Suntech Power


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announced a big one-time charge related to an investment in Shunda on Monday.

Analysts said that the one-time charges that caused an earnings headline miss seemed to be outweighing the JA Solar operational performance and outlook. The market reaction to the JA Solar earnings was to send shares down by as more than 8% on Tuesday morning. JA Solar surpassed its average daily trading volume of 7 million shares within the first two hours of the market open.

The Street view was for GAAP earnings of 23 cents. Excluding one-time charges, which also included a decline in the value of derivative securities, JA Solar earned 27 cents per share, and on an operating basis, the Chinese solar company earned 23 cents per share, in line with the Street.

The decline in the fair value of derivatives contracts in the second quarter was a point over which there was a lack of clarity, according to an analyst on the JA Solar earnings conference call, who did not want to be quoted until he had a chance for a follow up call with JA Solar management.

The combination of a revenue beat and a bullish outlook on 2011 was clearly at odds with the market reaction to the JA solar earnings. In particular, the one-time charges were pitted against a shipment guidance raise of more than 300 megawatts for 2010 from JA Solar management.

JA Solar's upped its shipment forecast for the year from 1 gigawatt to 1.3 GW, and describing "strong visibility" for continued demand in 2011.

It's not a complete surprise that JA Solar would selloff, even given its bullish guidance. To some extent, bullish guidance from JA Solar management is the expectation of investors. Additionally, when it comes to 2011 guidance, there is a wide divergence of opinion about the ability of solar companies to provide an accurate picture of what the industry will look like even 3 months out.

JA Solar's previous earnings outperformance, its recent stock gains, an EPS miss, incurring charges that were unexpected, and improving its gross margin by less than 0.2%, may have all contributed to an investor trigger to sell shares.

Expectations had been high going into the second quarter for JA Solar, and JA Solar shares had reached their highest value since the beginning of May -- when shares began a big slide -- during the trading session on Monday, at $6.61. In June, JA Solar shares were trading at $4.25.

All solar stocks were suffering losses on Tuesday as the weak macroeconomic outlook dragged down equities, which added to the pressure on JA Solar shares on its earnings day.

It looked like another day to book recent gains in solar stocks, and JA Solar was leading the sell-off.

-- Written by Eric Rosenbaum from New York.

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