Bad News Bodes Well for LDK Solar

Yesterday, LDK Solar (LDK) reaffirmed its Q1 2008 guidance for EPS. LDK actually guided to the high side for EPS as LDK stated a range of $.39 to $.44 for Q1 2008. The first call estimate is currently $.39. However, LDK missed on its revenue guidance. The consensus estimate was $221.79M. LDK’s guidance was $195M - $210M.

How is missing on revenue “good news”? The first reason is there have been huge weather problems in China where LDK is located. The roads have often been impassable due to snow and ice. There have been power outages. LDK is supposed to continue to be slowed until February 12. One would expect this to delay LDK production and shipments. Judging from the revenue figures, that is LDK’s expectation also. No doubt the storms are temporarily hurting Q1 earnings and revenue. Yet LDK still insists that they are going to beat or better Q1 EPS estimates; and they still have all those U.S. lawyers advising them not to misstate financial data.

This is actually great news! What it really means is that LDK’s margins will be higher than the consensus expectation for Q1. Add to this the fact that LDK has already sold all of its 2008 production at fixed prices. Add further that LDK has already contracted for most of the polysilicone it will need in 2008 at fixed prices. Then the picture becomes clearer. LDK is going to substantially beat 2008 estimates. It’s revenue should come back on track (or even accelerate) once the “severe” (interpret that as unusual) weather conditions disappear. Certainly we are already heading towards spring. However, the clearly higher than expected margins will still be there. This means a big beat on the 2008 year results for LDK.

Further, when the market tanked yesterday on the bad ISM news, LDK’s stock price went down to a low of $35.73. At $36 it is trading at approximately 21 times 2008 earnings. This is a great price for predicted 100+% grower (see Yahoo Finance). If you then realize that LDK will likely exceed its revenue figures for the full year 2008, you get a really rosy picture. There is no reason to think their margin figures will fall demonstrably from the Q1. One might even expect improvement with no weather problems to hinder the company. If you interpret LDK’s statement to mean it will at worst earn $.39/share on revenue of $195M, you can make a direct comparison to the consensus estimates of $.39 on revenue of $221.79M. After crunching the numbers, this comes out to LDK beating the consensus net margin by about 2.6% (21.2% vs. 18.6%). If this scenario plays out, LDK’s actual 2008 earnings should be about 14% higher than the current consensus estimates (or $1.97 vs. $1.73). This should be good news to the prospective investor. Of course, even this number may be low for 2008 earnings. LDK has typically exceeded the consensus estimates for revenue. The severe weather may be holding LDK back in Q1, but it is unlikely that such problems will exist for the remainder of the year. LDK should recoup the lost revenue and more. The fact that LDK did not lower its full year revenue guidance given the expected shortfall in revenue in Q1 should give some credence to this view.

In sum, this may all mean that you can get a predicted 100+% grower with a 2008 earnings P/E of 18-19 at yesterday's stock price. It sounds like a bargain. Even if the estimates I have made above are off by a little, the bargain still exists. LDK also claims no change in the polysilicone plant construction schedule due to this weather delay. If they manage to get that done, earnings could triple or even quadruple in 2009. Certainly the smaller first plant being built first lends some credence to Mr. Peng’s claims that he can get the second bigger plant up and running in record time. From an engineering standpoint having a “prototype” plant (the smaller first plant) to use to debug the problems before you make the mistakes in full production (the bigger polysilicone plant) is a generally accepted as a “great” engineering strategy. I am inclined to believe that Mr. Pichel’s warnings about this plant being grossly late are overstated. They may not be without substance, but they do not take into account the seemingly excellent leadership of Mr. Peng. They do not take into account the Chinese willingness to work seemingly 24 hours a day to get the job done. The main production factory may be late, but it seems likely to be done far ahead of Mr. Pichel’s (Piper Jaffray) estimate. The current 1 year target estimate for LDK is $59.49 (Yahoo Finance). The high estimate is $95. I think you can throw out the low estimate as sour grapes or market manipulation. A lot of the reasons given for LDK’s bad ratings from analysts recently have been margin concerns for 2008 (and possibly 2009). Yesterday’s news should quell those fears substantially. Clearly LDK is managing its margins better than the analysts expected.

Disclosure: Author has a long position in LDK