Sometimes Wall Street baffles me. I don’t understand how investors can bid certain stocks with questionable fundamentals to the moon, while others with great businesses are condemned to the doghouse. I have written about JA Solar (JASO) before and nothing has budged in terms of the stock price, yet the company just delivered another strong quarter. Something has to give soon.
Shining Brightly
JASO reported 2011 first-quarter earnings of 37 cents per share, beating views by four cents. Revenues of $556 million soared 91% over last year. Shipments jumped 66% over last year and the company forecasted a rise of 50% for the full year.
“Despite the seasonally weaker first quarter and uncertainties surrounding Italy’s solar policies, our first quarter performance illustrates that our strategic partners continue to recognize our clear market leadership on costs and technology,” said Dr. Peng Fang, CEO of JA Solar.
Italy just pared back their subsidies to the solar industry, which has been a big cloud hovering over the entire sector. I understand that reduced subsidies are a negative, but for the life of me I can’t figure out how this stock is trading at such absurdly low multiples. It is currently changing hands at 5x 2011 estimates of $1.23 per share. There are no fraud allegations like those of many other Chinese small caps, so the low valuation is puzzling to me.
The company is one of the lowest cost providers in the industry, which will help it to weather any storms due to oversupply and falling prices. These are valid concerns, but at this point I think they are in the stock. These valuations are suitable for a company that is on the verge of bankruptcy, which is obviously not the case here. Throw in an awesome ROE of 30.9%, manageable debt levels, a price/book ratio of 1x, and a healthy operating margin and you have a stunningly undervalued company.
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