Tuesday, May 10, 2011

Quick Comparison: First Solar (FSLR) vs. JA Solar (JASO)

JA Solar (Ticker: JASO) impressed investors today with its earnings report and its stock was given a nice 6% jump.  I was a little less impressed.  Here's why.  I am a big fan of huge gross and profit margins.  Why?  Large margins indicate one thing: a huge moat!  People are willing to pay a premium for the product relative to the cost of the product.  Ok, so you say, what's the big deal about profit margins anyway?  A company can still make money and grow revenues/profits even with low margins.  Yes, that is true, but the safety factor for companies with small margins is small.  Let's do a quick comparison.

First Solar 2011 Q1 Results
Revenue: $567 million
Gross Profit: $260 million
Gross Margin: 45.9%
Operating Margin: 20.4%

JA Solar 2011 Q1 Results
Revenue: $556 million
Gross Profit: $96.3 million
Gross Margin: 17.3%
Operating Margin: 15.0%

You can see that both companies made about the same amount of revenue, but the gross profit of First solar was more than double that of JA Solar.  This essentially means that the selling price of JA Solar's products were just a bit above that of its cost.  The one big risk that everyone talks about in the solar industry is falling average selling prices (ASPs).  It means that because many companies are ramping up production, the supply of solar cells/panels will exceed the demand.  As a result, the price of the cells/panels drop.  Because First Solar has a large gross margin, it is more insulated from dropping prices.  If ASPs dropped by 15%, you can bet JA Solar will be losing money.  First Solar may still be able to make money, but just less.

It is a little unfair to do this comparison, however, because First Solar makes panels and JA Solar makes cells.  Solar cells are essentially commodities and are typically a low margin business.  I guess this makes my point even stronger.  First Solar has proprietary technology that lowers its cost significantly.  However we spin it, First Solar's business is superior to that of JA Solar's.

Another interesting point...JA Solar has a very, very low SG&A component, about 2.3% of revenues (gross margin minus operating margin).  The company used only $12.8 million for sales, general, and admin expenses in the quarter, which is suspiciously low.  I'm wondering if there are any accounting tricks that were used.  You can compare this with First Solar's $145 million.  While this is high, it seems much more reasonable.

All in all, it is no surprise that JA Solar's P/E ratio is at a low 4.0.  Investors know this is a risky play.