LDK Solar: When Bad News Is Good

A funny thing happened with LDK Solar (LDK) on Tuesday. The stock gapped lower on the open after the company pre-announced figures for the fourth quarter. The release was not pretty and investors were not pleased.

Basically, the company said that revenue would come in at $425-435 million compared to previous guidance at $555 to 565 million. Solar shipments look to have been 245-255 MegaWatts compared to previous guidance of 260-270 MW, and gross margins will only be roughly 10-13% (previous guidance was 18-20%).

The fourth quarter data was disconcerting, but what likely spooked investors was a delay in polysilicon production. One of the most important initiatives over the next few quarters is the internal production of poly. This will keep the company from having to rely on suppliers for poly which can be difficult to produce, and expensive to purchase. While the company is actively producing a small amount of poly, it stated that there was a delay in ramping this production to a higher level… Bad news!

Back to the funny thing… It seems that by the end of the day, LDK was actually trading higher! Investors were able to shrug off the bad news because the stock was already trading at such low levels. Shareholders have been largely negative on solar names over the past few months, but once the bad news actually hits the public, it may be that the next surprising data will actually be positive!

Looking to 2009, the company is giving lighter revenue guidance of $2.3 to $2.5 billion. Despite being lower than previous expectations, the figures are roughly 45% above 2008 levels. Furthermore, the company is expecting gross margins of 22 to 27%. The margins are at least partially due to expectations of polysilicon production of 3,000 to 5,000 megatons. I should note that the poly delay was on the company’s 1,000 MT plant. It seems that the larger 15,000 MT plant (under construction) is still on schedule and should begin poly production in the second quarter. It is actually better for the company to gain the experience and make mistakes on the 1,000 MT plant so when the larger one is ready to ramp production, the company will have a better process in place.

Subscribers to the ZachStocks Growth Model have already made 9.5% in the name and we are looking for further gains. While Oppenheimer lowered EPS estimates to 2.90 for 2009, the stock still trades at roughly 5 times forward earnings. That’s likely a great deal for such a strong competitor. LDK is sitting on $380 million in cash and has access to $850 million in additional credit lines. So I expect the company to be financially stable and have adequate resources to continue to build its business. As the company shows progress in its poly production, and the market begins to realize potential in alternative energy, LDK should prove to be an opportunistic investment.

LDK Notes

Disclosure: Author does not have a position in LDK.

Comments

[canb888:]

Most encouraging is "... by the end of the day, LDK was actually trading higher! Investors were able to shrug off the bad news"... A buy signal based on my past experience.

Jan 08 09:21 AM

[gebby:]

i see nothing wrong with ldk as an investment. of course there are bumps in the road. the economics of global climate change is what should be driving this companies stock price. with a dramatic change in the climate man will struggle to survive. when do the analysts factor this science into their forecast?

Jan 08 10:07 AM

[Fred W:]

The analysis here is actually backward. In fact the "good" news was that LDK came to its senses and retreated from the poly si production game. Without tremendous scale and minimal environmental regulations, you don't want to be in this polysilicon production business--this is the part of the solar value chain to run from and LDK should not be criticized for coming to its senses. The only thing "funny" about this news is how the author of this article perceived it.

"While the company is actively producing a small amount of poly, it stated that there was a delay in ramping this production to a higher level… Bad news!
Back to the funny thing… It seems that by the end of the day, LDK was actually trading higher! Investors were able to shrug off the bad news because the stock was already trading at such low levels."

Jan 08 10:38 AM

[semi-guru:]

A positive opinion piece on the solar industry? My my, it must be a new year. How long has it been??? :)

The reduced guidance from LDK was expected since November, when investors slaughtered the stock for painting too rosy of a picture. It finally came home to roost. So once they announced, the news was already baked in. As I said in commenting on another article, the larger problem with LDK is why they don't have the sort of visibility into their business that the street and some analysts have, and why it takes them until the following quarter to realizer and announce it. After all, the miss was substantial, its not as if they were off by a couple of percent and didn't realize it until all the numbers were in.

LDK is an outstanding long term investment and has the potential of a 5-10 bagger once the poly plants are producing. I expect this will be stuck in a range for the next quarter or so, but the long term is what makes this attractive. Especially if the US can get off of its collective arse and get to work!

www.sfgate.com/cgi-bin...

Thank you Zachary for bringing some attention to this opportunity.

Jan 08 10:44 AM

[bill d:]

re: " the larger problem with LDK is why they don't have the sort of visibility into their business that the street and some analysts have " ????
Whole lot of credibility in that remark. Personally the lesser of 2 evils is what the company says about it's business - I can find a ton of analysts to tell me just about anything I want (or don't want ) to hear. Do your own analysis - Bernie will be glad to help you out.

Jan 08 03:35 PM

[guliamo:]

Solar companies future is relatively secure with the huge push this industry will get from Obama.

Jan 10 02:27 AM

[SolarGuru:]

As an American, I wish American companies worried less about quarter-to-quarter results and focused more on smart long-term strategies. LDK has an outstanding long-term plan. I wouldn't worry about short-term setbacks. I've been using this time to acculuate their stock. This stock will reach $80-$100 a share in 2-5 years. No doubt in my mind. Just take a look at the company's market cap vs. its sales. Sit on LDK. You will not be disappointed.

Jan 10 06:51 PM

[Zachary Sch...:]

Solar Guru - you certainly have a point speaking of long-term investments versus short-term quarter to quarter announcements. I do think it is important to look at quarterly announcements to ascertain whether long-term objectives are going to be met, but one quarter does not a company make.

The short-term gyrations in the stock actually give us as traders a better opportunity to make above average returns. Hopefully during this turbulent time we can separate the wheat from the chaff and end up with some solid investments at firesale prices.

Thanks for the comment!
Zach
zachstocks.com

Jan 10 10:31 PM