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JA Solar: Solar's First Vital Outlook

JA Solar will release the first important solar earnings of the season during the pre-market on Thursday, and 2010 outlook is key.



) -- Solar investors, get your earnings-season photovoltaic generators running.

The solar sector has already offered several earnings reports over the past few weeks, but none as important as tomorrow's pre-market report from

JA Solar



Solar investors have seen some big earnings shortfalls -- most notably the results on Tuesday from Evergreen Solar and Energy Conversion Devices. However, as far as getting a read on the outlook for the solar landscape in 2010 -- especially in light of the ongoing feed-in tariff tussle in Germany -- all eyes in the solar sector, from street analysts to investors, will be on commentary from JA Solar management on Thursday.

First things first: it is likely to be an especially strong quarter for JA Solar, and most of the major solar companies. JA Solar was up 4% on Wednesday, ahead of its earnings, while many solar companies were experiencing another down day. What's more, JA Solar already announced mid-December that its fourth-quarter shipments would exceed the high end of its guidance -- 210 megawatts.

However, investors should not let impressive fourth-quarter earnings from JA Solar and other solar companies obscure the fact that the solar industry faces headwinds headed into 2010.

The analyst consensus for JA Solar's earnings per share this quarter is 11 cents, with a high of 15 cents and a low of 7 cents from the street's 16 analysts that cover JA Solar. JA Solar lost 68 cents per share in the same quarter 2008.

JA Solar returned to profitability in the third quarter of 2009, with earnings of 10 cents per share and improved profit margins. JA Solar also increased its revenues in the third quarter to $193 million from $88 million in the prior quarter, and analyst expects fourth quarter revenues to come in at $213 million.

The JA Solar announcement in mid-December that it would exceed shipment guidance has led the analysts already bullish on the company to revise earnings upward. Dan Ries, analyst at Collins Stewart, has upped his JA Solar earnings forecast to 13 cents per share on revenues of $224 million.

The solar bulls are making their case ahead of the JA Solar earnings, more broadly. Piper Jaffray analyst Jesse Pichel put out a research note on Thursday saying that JA Solar will be less impacted by the coming feed-in tariff cuts in Germany because it can shift its business to China.

China and the U.S. are the big hopes to pick up the German slack, however, it also must be said that China has not even cemented a feed-in tariff level yet for its solar industry, and it has been the generous feed-in tariffs in Germany that have allowed for big margins among solar companies.

The big deal in the JA Solar earnings is its outlook, and both the solar bulls and bears are focused on this. Piper Jaffray's Pichel wrote that "We will be looking for JA Solar's comments on whether there is any order pattern change due to the German FIT cut uncertainty."

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Put more bluntly by Soleil Securities/Princeton Tech analyst Paul Leming, "It's quite clear that in the fourth quarter everyone in solar value chain moved heaven and earth to ship out the door, every cell they could get their hands on, so everyone knows the fourth quarter will be a great volume story."

The 64,000 solar questions, according to Leming are:

What will solar management, including JA Solar, say about their outlook in the first half and second half of 2010?

Secondly, will what solar management has to say pass the test of being credible?

"Any businessman in any industry always sees the glass as half full and the water level rising, but this time around, it's important for investors to monitor how much credence is given to solar management commentary," Leming said.

The Soleil Securities/Princeton Tech analyst noted that solar investors were burned when Spain installed a hard cap, and with the upcoming changes in Germany, solar investors are potentially setting themselves up for a second burn of the third degree if they are not careful in parsing solar managements' 2010 outlook.

The challenge with all these solar companies, according to RBC Capital Markets analyst Stuart Bush is that the fourth quarter was a strong demand environment, and the first quarter of 2010 may be the same, and that might even extend into the second quarter of 2010 if Germany delays feed-in tariff cuts to June.

"We are focusing on how much price deterioration solar companies are expecting in the back half of 2010. The key is how quickly average sales price on cells and modules fall in relation to pricing declines in silicon wafers," Bush said, adding "Will margins be able to track, or will they compress? We think margins will have to compress quickly across the chain and bring pricing down by as much as 20% in the second half of 2010."

Bush said he thinks the solar companies will be circumspect, saying the first quarter looks good, the second quarter looks OK, but beyond that the second half of 2010 is an unknown. "There is probably more risk to the back half than many analysts will recognize," Bush cautioned.

RBC Capital Markets has a sector perform on JA Solar, and Bush thinks being in the middle of the supply chain, as opposed to being an integrated player like

Yingli Green Energy


may place it under more strain in a rapidly declining price environment.

"Being a pure play in the middle of the solar supply chain, JA doesn't have a bankable, branded product, and during a period of project financing constraints, my view is that they get squeezed out in a period of over supply faster than the integrated players," Bush said.

-- Reported by Eric Rosenbaum in New York.


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>>Germany May Delay Solar Cuts Two Months

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