On Tuesday, the CEO of Chinese solar concern JinkoSolar (NYS: JKS) informed Bloomberg his company may soon begin buying back its "severely undervalued" shares. When you consider these shares currently sell for barely 1.7 times trailing earnings, I think a lot of people are going to see his point.
I also worry that a lot of these people are going to lose money if they listen to him.
Sure, at first glance Jinko's head honcho has a point. No company should be selling for less than two times the amount of profit it makes in a year. That's crazy talk. Problem is, rant over the unfairness though he will, Jinko's boss is talking pretty crazy himself. According to him, the company's just looking for a "proper time period to buy back our American depositary shares" while also buying "solar-power plant developers and contractors of engineering, procurement and construction overseas."
But when, I wonder, will the "proper" time be -- if not at a valuation of 1.7 times earnings? Must the shares fall to 1.6 times earnings? 1.5? 1.0?
Here's a thought: Perhaps Jinko should begin buying back shares when it actually has some money to buy them back with. Because that's Jinko's real problem. While the company's income statement claims wild profitability, in fact, Jinko is in pretty dire straits. It hasn't generated a penny's worth of free cash flow in any of the last five years. Indeed, Jinko burned $163.5 million last year, and so far this year, the company still hasn't released a cash flow statement updating us on how much cash it (hasn't) produced.
Granted, Jinko does have some cash saved up from past equity issuances. But less than $90 million is unrestricted, and it's dwarfed by the company's $176 million in long-term debt. I'm not convinced that negative net cash is a good position to be in when planning share repurchases simultaneous with an asset acquisition spree.
Long story short ... I wouldn't go long Jinko on the CEO's say-so. Likewise, I'd be cautious about buying other FCF-negative, debt-laden solar "bargains" such as Suntech Power (NYS: STP) at 5 times earnings, Canadian Solar (NAS: CSIQ) at 4 times, Hanwha SolarOne (NAS: HSOL) at 3 times, or LDK Solar (NYS: LDK) at 2 times. There's a reason solar stocks are so cheap today, and let me be polysilicon-crystal-clear here: It's not because the future's so bright, they gotta wear shades.
At the time thisarticle was published
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