If You Like Solar, LDK Is a Good Bet

Dec.21.07 | About: LDK Solar (LDK)

LDK Solar (NYSE:LDK) is a good long term buy at this price. LDK fell 15+ points yesterday. At the time of this writing (December 20, 2007), LDK Solar is priced at approximately $50. Its high of the week was about $75.

LDK was downgraded to sell yesterday by Piper Jaffray but was upgraded to strong buy by Needham & Co. It reported in line results for Q3 of 2007. However, its margins were clearly hurt. LDK’s “in line” results were on higher than expected revenue. The analysts’ predicted revenue was $143.2M. Actual revenue was $158.7M, a 5-fold improvement over the year ago quarter of $31.5M. Some quick math indicates that the margin for the recently reported quarter would be $41.6M earnings/$158.7M revenue = 26%. This is still a good margin. The analysts’ predicted margin was only 29% ($41.6M/$143.2M) for Q3, so it should not be that much of a disappointment. Is this 3% margin decline really worth $20 - $25 in the stock price? I think not. The concern is of course that the margins may fall farther. Indeed they may. Plus LDK has a lot of fixed price long term contracts. This is worrisome, but it is not necessarily bad.

Look at the total picture. LDK is ramping up production more quickly than predicted. Therefore earnings are still growing relatively quickly, even if margins decline a little bit. LDK has obtained financing for its polysilicone plant being built buy Fluor (a very reputable company). This is predicted to go on line in the second half of 2008. LDK already has or has contracted for a good portion of the polysilicone stock they will need for the first half of 2008. Originally the price of polysilicone was predicted to fall in 2008. It may rise, but it will likely not rise extremely quickly. LDK will be in the enviable position of being able to supply their own polysilicone in the very near future. This fact alone should allow them to have higher margins starting in the second half of 2008; and LDK’s production is expanding even faster than they predicted.

Why not wait to buy? Everyone else will have bought by then! Solar is one of the few bull markets still going. If you like solar, LDK is a good bet. Look how its last quarter compares to other solar makers:

Most of these companies will experience the same problems that LDK will experience. However, most of them do not have a huge polysilicone plant coming online in the second half of 2008. None of them were accused of accounting problems. However, LDK has been cleared of any illegal accounting by an external audit committee headed by a top U.S. law firm and supported by a big 4 U.S. accounting firm.

In addition LDK has ensured its growth with long term contracts. Solar prices are still predicted to fall over the long term. LDK is likely well off to have locked in “high” prices for its microcrystalline wafer production for the long term. LDK is growing quickly. LDK has a great business plan, which includes a vertical monopoly situation by having its own polysilicone plant. It has the financing already in place for this polysilicone plant. It has a CEO who was named Entrepreneur of the year in China (Mr. Peng). It should outperform the competition. I further point out that Needham & Co. has been more correct about LDK’s recent performance than Piper Jaffray has. It is a buy, if you are buying solar.

Disclosure: Author has a long position in LDK