Is JA Solar a Growth Trap?

By Tim Beyers
I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.
Next up is JA Solar (Nasdaq: JASO), a Chinese maker of solar equipment that recently announced 500 megawatts worth of orders, or enough to supply power to upwards of 100,000 homes here in the U.S.
Deals like these help explain why the stock has rallied more than 70% over the past year. The S&P 500 is up less than 7% over the same period. Can the rally continue? Sure, if growth also continues. Let's get right to the numbers.
Foolish facts

Metric	JA Solar
CAPS stars (out of 5)	****
Total ratings	1,478
Percent bulls	95.3%
Percent bears	4.7%
Bullish pitches	176 out of 191
Highest rated peers	Yingli Green Energy (NYSE: YGE), Suntech Power (NYSE: STP), SunPower (Nasdaq: SPWRA)

Data current as of Sept. 18.
Fools like JA Solar, and I understand why. Solar is important technology and the government is offering incentives to those consumers who want to invest. Businesses, too, can qualify for tax credits for using manufacturing facilities for clean energy production.
Incentives lead to demand. Demand leads to growth. And growth, at least one Fool says, leads to a cheap valuation of JA Solar shares.
"Just went over the numbers, thinking I might sell (real world) after the 10% bump today. But: Translate their 1.35GW guidance for this year into Q3 and Q4 earnings, and they are worth closer to $15 than $10 by February. Throw in that enormous new contract for 2011 and a great new module due out this year, I bet they hit a new high within two years. That's a triple or better at $7 and change," wrote Foolish investor SydParrot recently.
The elements of growth

Metric	Last 12 Months	2009	2008
Normalized net income growth	787.5%	Not material	156.9%
Revenue growth	84%	(30.8%)	102.6%
Gross margin	21.3%	12.7%	18.2%
Receivables growth	340.5%	(4.4%)	563%
Shares outstanding	162.7 million	169 million	168 million

Source: Capital IQ, a division of Standard & Poor's.
There's plenty to like in this table. Let's review:

• First, while revenue growth is inconsistent, this is what we've come to expect in emerging industries and emerging markets. What's important is the acceleration. When JA Solar grows, it grows.
• I'm also encouraged by the turnaround in receivables. This is such a fickle industry that management needs to be smart about inventory management.
• Finally, look at the shares outstanding. That management is repurchasing shares in a time of growth says they're either (a) crazy, or (b) well-prepared. Given history and the stock's record of outperformance, I'm going with "b."

Competitor and peer checkup

Competitor	Normalized Net Income Growth (3 yrs.)
Canadian Solar (Nasdaq: CSIQ)	Not material
JA Solar	50.3%
Solarfun Power (Nasdaq: SOLF)	134.6%
SunPower	2.7%
SunTech Power	(87.6%)
Trina Solar (NYSE: TSL)	117.1%
Yingli Green Energy	Not available

Sources: Capital IQ. Data current as of Sept. 18.
Unfortunately, you can't see what's most interesting about this table. While JA, Solarfun and Trina have all produced superior income growth over the past three years, only Solarfun and Trina have produced positive stock returns.
JA Solar is down more than 47% over the same period. Read that again. Income is up more than 50% in each of the past three years, yet the stock is down close to 50%. And with a PEG ratio of 0.38, is valued at a sliver of its estimated long-term growth rate.
Grade: Sustainable
I'm a believer in JA Solar Holdings at present levels, in part because of the valuation but also because I'm convinced there's no quick end to the incentives that will fuel demand for new solar cells.
Now it's your turn to weigh in. Do you like JA Solar at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.