The Truth About JinkoSolar's Earnings

| About: JinkoSolar Holding (JKS)


JKS earned $2.80 per undiluted share in the year 2013.

Yahoo Finance (informed by S&P Capital IQ), among others, has been inaccurately reporting JKS earnings, showing $1.12 in earnings, only 40% of its actual earnings.

Having been brutalized in part because of faulty reporting, JKS may have a P/E of 6 at the end of Q1.

With the highest margins and lowest costs among silicon solar panel manufacturers, Jinko deserves a P/E of 15 or 20.

Should a company's GAAP or non-GAAP earnings be reported by Yahoo, which gets its data from S&P Capital IQ?

Whether GAAP or non-GAAP, should Yahoo/S&P Capital IQ be consistent? If it typically reports non-GAAP earnings, should it report non-GAAP earnings for ALL stocks?

For whatever reason, Yahoo/S&P Capital IQ reports non-GAAP earnings for other solar companies, but reports the GAAP earnings for JinkoSolar (NYSE:JKS).

In the year 2013, JinkoSolar earned $2.80 per share ($2.64 diluted), using non-GAAP rules, but Yahoo/S&P Capital IQ reported only $1.12.

Yahoo/S&P Capital reported the GAAP (diluted) earnings for JKS, while reporting the non-GAAP earnings for others.

This might be acceptable if Yahoo/S&P Capital IQ reported only the GAAP earnings of stocks, but Yahoo/S&P Capital IQ typically reports only the non-GAAP numbers. It is unclear why Yahoo/S&P Capital IQ chooses to report the GAAP numbers for JKS.

The misreporting leads investors to believe that JKS earned 40% as much as the company actually did.

Has that led to many long investors losing money? Of course.

Investors have been making decisions regarding solar companies based on their non-GAAP earnings. Yahoo/S&P Capital IQ correctly reports that SunPower (NASDAQ:SPWR) made $1.61 in non-GAAP earnings in 2013. The stock price as I write is $31.68, giving SPWR a trailing 12-month P/E ratio of about 19.

If investors were to believe the misreported numbers, they would believe that JKS, whose stock price as I write, is $26.74, has a P/E ratio of nearly 24.

In actuality, using the correct, non-GAAP numbers, JKS has a P/E ratio of about 9.5. Does it make a difference when looking at one's portfolio on, that a company has a P/E ratio of nearly 24 versus a P/E ratio of about 9.5?

Of course it makes a difference!

And yet, Yahoo/S&P Capital IQ continue to report the wrong numbers for JKS.

S&P Capital IQ probably uses computers, and not humans, to read press releases from corporations. The computer likely searches for the first number sitting next to the word "earnings", and then calls that the earnings, no matter if it's GAAP or non-GAAP. To cut costs, likely no human being ever checks the accuracy or consistency of these numbers.

Financial news, reports, and analysis is then produced using Yahoo/S&P Capital IQ numbers. So, misreporting multiplies and proliferates, and the untrue becomes virtual reality.

How has the faulty reporting affected stock prices? Not surprisingly, JKS now has perhaps the absolute lowest P/E ratio of all solar stocks listed in the United States.

Yahoo/S&P Capital IQ reports that JKS has a forward (2015) P/E ratio of about 5.5.

Having earned $3.36 over the past three quarters and $2.80 over the past two quarters, it would not surprise those who know the true numbers to see JKS achieve a P/E of 6 by the end of this quarter (March 31).

With a stock price of $26.74, JKS would need to earn only $1.20 in Q1 2014 to earn a total of $4.56 in the trailing twelve months, giving it a P/E of 6.00. Over the past two quarters, the company has earned an undiluted average of $1.40 per quarter, so $1.20 in a quarter is certainly doable.

What type of trailing P/E should a quickly-growing solar company deserve? On March 24, a Motley Fool writer recommended SunPower, in part because it had a trailing P/E of "just 20 times" earnings. SunPower deserves to have a P/E of at least 20, because it is a great company that will grow with capacity expansion in 2015. And it has a little-known JV in China that has just begun adding substantially to earnings.

If JKS earns another $1.40 in the first quarter, and if it has a trailing P/E of 20, it then has a stock price of $95.20.

If JKS earns only $1.00 in the first quarter, it would have earned 4.36 in the trailing twelve months. Giving it a modest P/E of 15 would multiply its current stock price by nearly two and a half to $65.40. That's a conservative estimate (read on).

Now, SPWR is much more familiar to smaller investors, and has a long history of leading-edge technology. But JKS is no slouch, either.

Jinko has top-notch, but much cheaper, technology.

Jinko makes more dollars per share for its shareholders than any other major silicon solar company.

Hence, at least three investment firms have set their price targets at $45 or more. These include Credit Suisse and Jefferies (with a $49.20 price target).

Credit Suisse writes:

Our $45 Price Target reflects just 11x our 2014 and 7x 2015 EPS estimates, leaving ample room for further upside should multiple expansion take hold as uncertainties in the downstream business abate.

Credit Suisse values Jinko's project development alone at $26 per share. With the current stock price at $26.74, the 2.4 GW of module sales in 2014 must be virtually worthless.

Jinko completed just over 200 MW in projects in 2012 and 2013 combined. But in 2014, Jinko will build 400 MW in projects, with 1.1 GW additionally in its pipeline, meaning there is the potential for far more than 400 MW in projects.

And Jinko tends to surprise to the upside.

With the stock price having plummeted about 20% in a week, one might believe that module sales must be scheduled to disappear. Jinko sees module sales increasing from 1.77 GW in 2013 to a range of 2.3 to 2.5 GW in 2014, an increase of about 36%.

Chinese solar companies installed panels at a torrid pace in the fourth quarter of 2013, in order to beat a feed-in tariff deadline; they will not repeat that performance in the first quarter of 2014. In fact, Jinko projects a quarter-to-quarter slowdown in the first quarter. While this may indicate lower earnings to some, Jinko may surprise, as it has for the past four quarters.

While an extremely high wattage of completed projects may have been interconnected in December, these projects may be sold in the first quarter of 2014. This is not uncommon in the project business. As a result, Jinko may make more per share in Q1 than in Q4!

And while the torrid pace of shipments in Q4 may not be repeated in Q1, that pace will be substantially exceeded in Q2 or onward in order to meet the 2.4 GW sales goal.

The Chinese government well-exceeded its 2013 installation goals, and now it has set a 14.5 GW target for 2014. Who will supply the panels for this unprecedented national goal? The government now allows unprofitable solar companies to go bankrupt. Entire gigawatts of capacity will stop producing. Notorious cases of ceased or slowed production due to financial trouble include Suntech, LDK, Chaori, and Topoint (from which Jinko took over 500 MW of wafer and cell capacity and 100 MW of module capacity).

JinkoSolar is a market leader in gross margin, at 24.7 percent. Most of its peers languish in the 10 to 16 percent gross margin range (TSL, JASO, YGE, HSOL, and SOL).

How does Jinko lead so clearly?

First, JinkoSolar is the cost leader among silicon solar panel manufacturers. This not only boosts its profits, but also guarantees profitability, even if ASPs go down.

Despite the lowest-cost production, Jinko sells its panels at prices similar to other first-tier solar companies.

In addition to being the gross margin leader in panel sales, Jinko also seems to be a leader, or the leader, in project development, with gross margins at 60% and net margins at 30%.

Vertical integration helps with Jinko's margins. Jinko just expanded its wafer and cell production by 500 MW each through highly discounted acquisitions from Topoint. This should lower costs even further, and the high-quality manufacturing equipment is newer and better than many manufacturers' regular equipment.

This strategy seems to have served Jinko well in the past, and lowered its costs.

Jinko concentrates more of its sales in China than other top producers, so it saves on marketing and sales costs.

Now that China is shifting into high gear in its war on pollution, JKS should benefit more than other companies, and it has long been preparing for the boom in distributed generation.

Jinko will take a major share of the planned 14.5 GW of installations in China this year.

And while some investors are selling solar companies in response to Chaori Solar's debt default, JKS is celebrating, as it has no debt problems, has a good relationship with the China Development Bank, and competition has been going out of business in droves.

According to SunEdison (SUNE), distributed generation projects actually offer higher gross margins, and 700 MW of Jinko's 1.1 GW pipeline consists of distributed generation. Further cost reductions, economies of scale, greater vertical integration, and increased conversion efficiencies will also increase gross margin. With projects taking up more of the revenues and with a 60% gross margin on projects, project revenue may triple from 2013.

With the better mix and better margins, gross margins may increase from the industry high of 24.7% to somewhere between 25% and 30%. A 2.5 percentage point increase in gross margins would represent a greater than 10% increase in gross margins from Q4. And if Q4 is an "average" quarter for JKS for 2014, then one can easily envision $6.00 in earnings for 2014.

That would be non-GAAP, undiluted. Yahoo.

Slap a 15 P/E on that, and consider a $90.00 stock price for JinkoSolar.

Disclosure: I am long JKS, SPWR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.