LDK, First Solar Will Continue to Rebound

By Jason Simpkins

After a strong 2007 campaign, solar stocks - and the overall clean energy sector - fell hard in the first quarter of 2008.

The PowerShares Wilder Hill Clean Energy Portfolio (PBW), an industry standard, plunged nearly 30%. But now that their darkest days are behind them, solar stocks represent a big play opportunity for any investor savvy enough to buy in while valuations are still low.

At Money Morning, we’ve said repeatedly that alternative energy isn’t an alternative anymore. Indeed, soaring energy costs and heightened awareness about global climate change have ushered solar power into the mainstream over the past year.

On Friday, light, sweet crude for May delivery rose 20 cents to $110.31 a barrel in afternoon trading on the New York Mercantile Exchange - just below the record price of $112.21 a barrel set Wednesday. Notwithstanding a much-criticized Energy Department projection that the escalation in petroleum prices will stop by June, there have been few - if any - real indications that oil and gasoline prices will retreat heading into the summer driving season.

That’s particularly bad news for consumers who are already feeling the pinch from the credit crunch and sinking home values. But it’s another round of good news for solar energy, which will almost certainly receive more attention - from the public, and from elected officials who feel compelled to extend, and even broaden, tax subsidies for renewable energy.

Reuters recently reported that a new bipartisan proposal by U.S. senators Maria Cantwell (D-Wash.) and John Ensign (R-Nev.) would extend existing tax credits for the clean energy sector. Many Wall Street analysts have said the measure has a good chance of passing because it is not linked to a tax hike or to "Big Oil."

In addition to offering an alternative to costly and politically contentious foreign oil, solar power is also popular with environmentalists. That’s because solar power emits, per unit of energy, about one-tenth the amount of carbon dioxide emissions given off by more-conventional power sources.

Also, advances in technology have made solar cell production even more eco-friendly. A recent study by the Brookhaven National Laboratory in Upton, N.Y., found that for each unit of energy produced by solar cells, the pollution that’s emitted during the cells’ manufacture is only 2% to 11% the amount produced by power plants in the United States and Europe.

In fact, newly developed solar cells can "pay back" the energy required for their production in just one to three years. And improvements in manufacturing efficiency could reduce emissions from solar power by another 50% in five to 10 years.

There have been tremendous advances in the production and efficiency of solar technologies. And those advances couldn’t have come at a better time. Political support for the industry is at an all-time high as oil prices and environmental awareness both continue to rise.

The "First" Option in the Solar Sector

The shares of First Solar Inc. (FSLR) were badly battered during the first quarter. After climbing as high as $280.91 a share in December 2007, First Solar shares tumbled to $165.60 in February. Since then, they’ve battled back and are currently trading near their 52-week high. And there’s good reason for all the company’s forward momentum.

First Solar’s reliance on low cost thin-film cells helped the company avert a silicon shortage that has savaged the bottom lines of countless other solar companies. As a result, the Phoenix-based solar module manufacturer has been able to produce solar cells for a lower cost than its rivals.

"First Solar’s new technology that uses cadmium telluride is much cheaper," Matthew Patsky, portfolio manager of Winslow Green Mutual Funds [WGGFX], told FOXBusiness. "The cost of their solar cells is much less than the cost of the traditional [silicon-based] cells, so if you’re doing an installation on any scale, they are the best alternative right now."

First Solar’s ability to undercut the competition helped it to rake in a $62.9 million profit last year. That’s a 686.3% improvement from the $8 million posted in 2006. Revenue nearly quadrupled to $200.8 million.

First Solar expects revenue to rise again this year, to between $900 million and $950 million.

To fuel that surge in revenue, the company will rely heavily on its globally diversified production base. Company officials said last year’s earnings were boosted by the full increased efficiency at their factory in Germany. This year they expect additional savings from a brand new plant in Malaysia.

"As we’re moving to Malaysia, I think our models imply a 20 cent cost-per-watt reduction," Jens Meyerhoff, First Solar’s chief financial officer, told a Piper Jaffray investment conference.

The company expects its first Malaysian production line to start running this year, followed by three fully operational lines in 2009.

First Solar is also in talks with several U.S. utilities to build renewable energy projects. Chief Executive Michael Ahearn told Reuters the company was "having multiple discussions" with U.S. utilities.

"What we are trying to get to this year is some initial relationships and pilot projects," he added.

Impressed with the company’s prospects, Winslow Green’s Patsky took advantage of First Solar’s turbulent first quarter.

"In January, the stock dropped to around $160 and we re-established a strong position," Patsky said. "If it hits $300 in the near term, we might trim our position again; but our target is really for it to be trading at $380 over the next 12 months - the estimates are too low and I don’t think the street is as aggressive as what we expect."

Canaccord Adams recently reiterated its "Buy" rating on the stock and added First Solar to its "Best Ideas" list.

"We recommend investors add to positions in front of First Solar’s Q1 report on the back of 5N’s results," the firm said in a statement. "With the political backdrop improving for solar stocks in general, reduced near-term execution risk and likely upside to our estimates, we are adding First Solar to our Best Ideas list and reiterate our BUY rating and $325 price target."

First Solar’s shares closed Friday at $268.30, down $2.90 a share, or 1.07%. The stock is trading only 8% below its 52-week high of $291.49.

From a Hot IPO to a Reliable Rebound

LDK Solar Company Ltd. (LDK), which debuted on the New York Stock Exchange last summer, grabbed the spotlight when it climbed 140% in its first four months of trading. But, as of March 12, the stock had plummeted 72% from its 52 week high.

The shares have rebounded in recent weeks - soaring 54% since March 12 - and closed Friday at $32.35 each. That’s still well below its 52-week high of $76.75, but some recent positive developments indicate that LDK will continue its resurgence.

The company just announced the signing of three new contracts, including a 10-year pact with Moser Baer Photo Voltaic, a division of Moser Baer India Ltd., which calls for the sale and delivery of high-quality, multi-crystalline silicon wafers necessary in the production of PV cells that are capable of generating 640 megawatts (MW) of solar power.

LDK will also provide Silcio S.A. with 50 MW of silicon wafers over the next 6 years, and Arise Corporation of Canada 33 MW of silicon wafers between 2008 and 2011.

And LDK is pushing to expand. It expects to complete a brand-new silicon plant with a 1,000-ton production capacity this summer. And another plant with a production capacity of 15,000 tons per year is set to come online some time next year. In addition to the $1.2 billion the company expects to spend on the new plants, LDK will spend another $600 million to expand its wafer production in the next year.

Chief Financial Officer Jack Lai said at a recent conference that LDK would finance the bulk of its ambitions growth plans through cash from operations. That includes expected net profits of $200 million in 2008 and $400 million in 2009. An additional $1 billion will come from customer deposits for long-term wafer contracts, he said.

LDK will finance the rest by issuing $400 million in convertible notes. The notes will pay cash interest semiannually at a rate of 4.75% a year, and in certain circumstances will be convertible into the company’s American depositary shares.

LDK said last week it expects higher revenue but lower profit than initially forecast. The company expects earnings per share to come in between 40 cents and 44 cents, down a penny from its previous prediction. However, LDK raised its revenue outlook by $15 million to a range of $225 million to $235 million.

There’s a strong possibility that LDK shares could get a boost from upgrades from Wall Street in the near future. Four of the six analyst ratings for LDK are a "Hold" or worse, according to Zacks Investment Research. Any upgrades or new coverage based on the company’s positive news could push the share price up even more.

Comments

[tessant:]

both of these stocks have been acting very bullish lately. throw in the price of oil, and you have a long trade opportunity...

scott
-marketbar

2008 Apr 14 01:39 PM

[CT Programmer:]

Buyer beware. LDK's P/E looks good at 24 compared to FSLR at 130, but that doesn't change the fact that its not likely to live up to that in the long run. The bubble popped once on these solar stocks, and it will do it again. I am long on PBW, but advances in solar will be slow and gradual, and eventually (10-20 years) overtake oil and gas. It all boils down to cost, and anyone who's actually priced a solar system will tell you they are VERY expensive and not economical yet without heavy government subsidies, and even with those you won't break even for 15 years. Thinking that in that 10-20 year time-frame any one solar stock now will be the rising star and dwarf the others (or even still be in business) is a long-shot. Go long the whole sector with something like PBW, but beware on any given individual stock.

2008 Apr 14 02:04 PM

[dicki31785:]

Just to be sure we understand each other....I am totally bullish on Solar....but FSLR?Being worth 20 Billion...?!?you have got to be kidding me....even if it can expand to a significant size then it faces a serious telleraium problem...as another author on seeking alpha underlined as well..which i tend to agree with...though fslr is a nice company with a great technology...20 billion no thank you...

lets see what happens if they miss on a quarter estimate...FSLR is just too risky...where are the potential rewards?!?is it going to be worth 40 billion i doubt it the industry is young and lots can happen....with kind regards from germany

Dicki

Long CSIQ

2008 Apr 14 02:38 PM

[keanemd:]

Hey

I would say that being long PBW is the best option. There will be too many girations with stocks like FSLR and LDK that put the safety of PBW in a better light.

2008 Apr 14 03:03 PM

[Fighting Yoda:]

Solar stocks are a bigger bubble than even .com. You have an opportunity now to sell out. Get out and stay out (for a long time).

There is a difference between good business (and technology) and a good stock. These stocks are horrible.

2008 Apr 14 06:31 PM

[Doublechin:]

This guy is in charge of the LDK investor group going to visit the LDK plant! Look at this post where the brags about SHORTING LDK! WHAT A JOKE!

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Ha,
you should have a look at the yahoo board. There will be a lot of
women beaten up tonight..... No doubt.

My guess on the premarket pop was that there were loads of idiots on
Yahoo pumping the flyonthewall report about the SEC dropping charges.
I think that was what drove it up so much premarket. No volume so the
retail guys can make a difference then. You could see it happening,
hundreds of them posting it.


I tried to tell them that the news was out months ago and got
lambasted as a short for my trouble.


I was on to hakan and said as much "ie the fools on yahoo pumping sec,
but i dont think the pros will fall for it, so be careful buying in".


To be fair, i bought premarket too, but dumped it and shorted instead
as soon as i saw all the gains start to give up.


For the record i think we'll keep going down tomorrow. Ill be keeping
all my puts on Yge, and a few of the LDK ones, but i covered the FSLR
short. If it looks like a recovery tomorrow ill get back in long too...

finance.google.com/gro......

2008 Apr 14 08:20 PM

[FWallace:]

I too like CSIQ and PBW... these two are the one's i'll invest my hard earned money... the others are very risky, and i've already lost a bundle when the Markets switched from bull to bear...caution!

2008 Apr 14 08:37 PM

[gebby:]

it is not difficult to pick amongst the solars to make money. fslr is the leader like it or not. and when it makes a new high the others tend to eventually follow. buy your favorites. you dont have to buy fslr if you are uncomfortable with its price. ldk is a good buy. it will eventually get back to 70. maybe by june. these stocks are not a dotcom bubble buy any means. government subsidies to get these industries of the ground will continue until there is self sustaining demand. GLOBAL WARMING IS REAL. MAN WILL NOT DIE OFF WITH OUT AN EFFORT TO SAVE HIMSELF. BEARS IN THIS GROUP DONT GET THIS.

2008 Apr 15 10:14 AM

[tech-geek:]

I'm with all those FSLR bashers. If you're in now, dump your stock. Just like the others on here, I need you to run from this cave, so that I can buy cheap and ride the gold-mine. So please, let your fear run wild and watch the rest of us pave the future. It's all about the psychology of the market, isn't it?

2008 Apr 15 01:53 PM

[reagan:]

Global warming is a myth. Solar stocks are not.

2008 Apr 15 08:19 PM

[dicki31785:]

tech geek - maybe a nice comparison for you Q cells the worldwide leader in solar cells from germany is worth 5 billion euro so about 8 billion dollars....and fslr 22 billion....hmm hmm hmm i really wouldnt consider this a buy...would i dare to short it?no...but certainly not a buy....with kind regards from germany

2008 Apr 16 05:57 AM

[buyforeclos...:]

LDK looks like it has the most upside at $32... I like SOL alot but it has skyrocketed already but may have alot more upside..keep your eye on it...YGE could also go to 50 by years end...but that one is up and down..I sold half my position just to lock in sure profits but think it will continue to climb with the solar mentality

2008 Apr 20 12:19 AM

[ArcticFox:]

First Solar is already outdated technology. Nanosolar has a superior product and a superior manufacturing process and is positioned to begin taking a portion of their customer base in 2008 and 2009 (EDF and Conergy 2 examples). Silicon still has higher efficiency. PV is a constant race for technology, and all compainies are long term risk. Going with Conergy as big turnaround/restructure play. They take the best tewchnologies available and deliver the finished product. EDF and other utility companies ditto.

2008 Apr 26 10:04 PM