Margin Concerns Make LDK Solar Vulnerable to Profit Taking

LDK Solar Co. (LDK) failed to break above its April 7 high of $39.25, topping out intra-day at $38.56 before falling to close up 1.75% to $36.57 on Wednesday. It’s surprising that LDK has managed to hold its ground and even flirt with a three-month high after issuing margin guidance on Monday that was much lower than anticipated. It seems that the stock has remained artificially high because of the continued flow of money into the solar sector while continuing to rise in sympathy with other “green” names that have been quite euphoric as of late – take for instance Canadian Solar’s (CSIQ) 25% move on Tuesday on blow-out numbers and Evergreen Solar’s (ESLR) 9.83% pop on an analyst upgrade yesterday.

However, that could change quickly if there is some rotation out of the sector once the severely propped up price of oil decides to retrace from current levels. LDK is vulnerable because although first quarter revenue and earnings were better than consensus estimates, the full year picture is quite mixed. Revenue guidance in the range of $1.08 billion to $1.18 billion is much better than the $1 billion previously expected, but potential gross margin erosion over the next few quarters is troubling.

During the first quarter, gross margin was 27.7%, down from 30.1% from the prior quarter and is expected decline further to a range of between 23% to 28% for the remainder of the year, well below management’s previous estimate of 26% to 31%. With the construction of a plant still underway and unlikely to be a positive factor in the near term, higher polysilicon costs will persist in exerting pressure on the outlook and leave LDK shares vulnerable to profit taking, especially after nearly doubling in value since March.

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Comments

[User 13033]

I'm asking who is paying you. Every 2 days you write against LDK. Ok in the last quarter, the cy mentionned the downtrend of their profit margin. But it was also written that this trend would change with their own facilities. The first will be in production in the 2d half of this year.
And among all the solar stocks, which one has a profit margin higher than 25%?
With their own production, this rate could reach again 30 % and may be more.
Frankly, I don't understand your reasoning.

[annyone]

Which PV solar has better margins than LDK....

[buddhalovesrubs]

Opportunist on the heels of Situ, Pitchel, etal. Why focus on polysilicon cost that is affecting the entire sector as a negative to only LDK? Help me understand why analysts use different measuring sticks for same sector companies. Most important, just be honest about what you really think..."The Chinese company, LDK, can't produce polysilicon in 2008". BTW, LDK margins are still healthy and are top rated in the sector. They are on track to produce a NUCLEAR power plants worth of PV solar each year....yea...2GW's!!! How about reporting that?

[EnergyFinancier]

If you're interested in solar stocks, you should attend the Renewable Energy Finance Forum-Wall Street (REFFWallStreet.com), held June 18-19 in New York City. One of the official event sessions will feature the CEOs of First Solar, LDK Solar, Applied Materials, and SunPower in a discussion about the future of the photovoltaics industry, as well as the economic and policy factors (like the Production Tax Credit) fueling growth and development.

[buddhalovesrubs]

Just in case any reader who may be uninformed about the LDK saga reads this and feel LDK's situation is negative, you should know this is both a stock and a war. It has been heavily shorted and at the same time is an outstanding company with an extraordinary future. It will be the largest producer of polysilicon in the world in 17 months providing all of its requirements at $45/kg as others will pay a minimum of $200/kg for several years and it has secured all of its silicon requirements for the time until their own plant begins production, has over $20 billion in sales contracts to nearly every top solar panel company in the world and it is flat sold out for 2 years. It has the highest margins of any solar company. Due to a fired employee last year who sent false information to everyone possible LDK was doubted and became the subject of a massive and endless short attack, the last stages of which continue to this day because of short positions remaining at the beginning of a sector move. It is being viciously attacked with false and planted news stories. It’s hard to believe for a newcomer but it's true and this article is one of them. The stock is worth at least 3 times its current value and will be there as soon as the shorts can keep it down long enough to cover and go elsewhere. It's a very poor short target now but they got stuck with a bad move. Keep an eye on LDK and watch it breakout, today, next week, or during the summer. This is the time to enter.

[buddhalovesrubs]

pseodonym credit goes to "solarexpert"... for May 15th 12:38pm comment:
"Just in case..."

buddhalovesrubs posted at the request of "solarexpert"... from Yahoo LDK message board.

[raja]

LOL - Another name for this piece of writing = JUNK .

I dont expect anything classy or unbiased from Seeking Alpha

[tessant]

this stock could be range bound until confirmation of the higher profit margins in 2009....

-Scott
solarfeeds

[Trader Nick]

for any reader who is looking for the sinlge best solar investment out there don't let the negative sentiment scare you off. if you compare ldk to any other solar based on profitability, margin ( yes profit margin!)
pe ratio, peg or any other measure of value, you see that this stock is on sale! closeout prices. but what your not seeing with these value comparisons is the incredible growth story (new poly plant)that will make this stock the # 1 poly producer in the world and increase margins tremendously. foolish short sellers have been selling this stock all the way into the low 20's and now some 14 million are trapped in what is most probably a losing position. just look at the daily chart is shows a series of higher highs and higher lows of the march low. we are now consolidating in what appears to be the right shoulder of a reverse head and shoulder accumulation pattern. the market is a forward pricing mechanism so when the start actually producing poly this stock will alredy be a lot more expensive. bottom line dont,t let these failed fundamental and technical analysts who are holding these losing short positions talk you out of a potentially great returning investment

[ezetrader]

Don't worry about the margins with LDK. They are still better than anyone else. The closest direct comparison will be Renesola (SOL)who are another Chinese wafer maker that just reported Q1 with $123M in revenue compared to LDK's $233M. SOL had gross margins of 22.1% and net margin of 14.4%. Compare this to LDK with gross margins of 27.7% and net of 21.3%. In first quarter 2008 Renesola earned $0.28 per ADS and is trading at $26 whereas LDK had earnings of $0.45 per ADS and is trading at $36.

Now add the following to the equation:

1) LDK's poly plants will start producing this year and will become the largest in the world when completed. The funding in in place for the poly plant whereas other solar companies can only dream of being in such a position. The plant is ON SCHEDULE.
2) There are $billion in booked orders, estimated at about $20B from LDK's partners who are the largest solar panel makers in the world such as Q-Cell. Many of these partners have prepaid orders to help LDK complete their expansion plans. Once complete, the poly plant is expected to increase gross margins to as high as 50+%.
3) LDK has just announced accelerated ramping of wafer capacity to 1.1GW capacity by the end of 2008 and 2.0GW by the end of 2009. The original plan was 800MW by the end of 2008.

With the possible short squeeze position and the $200M stock buyback, I think LDK is one of the best investment opportunities out there.

[carlivar]

I hope there is profit-taking! I want to buy some more. Get that price down!

[gebby]

why should solars come down if oil corrects? this is always the argument for selling solars. never the argument to buy solars because oil is going up. oil has gone up all year and despite this the solars have lagged. stay long ldk as part of a solar investment strategy. in the solar sector is tremendous growth. margin compression and expansion along the way. eventually ldk will break above 40 and go to 60. it may pull back first or it may not.

[maxbid]

Don't you just love it when the comments are more informative, and have numbers to back it up, than the writers article!

Compare net margins and you'll see that LDK has approximately 2X the net margin of TSL.

Look to 2009 and you'll see that LDK will have 3X or more net margin than TSL.

[AtlanticAve]

I agree. The comments here are more informative than the article. I had been looking at LDK this evening and I couldn't quite understand why it is sitting at such a low SP. Then I stumbled upon this article.

Thank you everyone for posting such informed analyses. It only corroborates what I had already discovered: LDK is undervalued. Yes, the solar sector is quite volatile. But for me, it's time to buy this stock.

Analyst consensus has EPS growing at 85% a year for the next five years
(finance.yahoo.com/q/ae...).

Forward PE (through Dec 31, 2009) is estimated at less than 10.
(finance.yahoo.com/q/ks...)

5-year PEG is estimated at .25 (!!!).
(finance.yahoo.com/q/ks...(

I ran a simple DCF calculator and came up with an SP of north of $210.00.
(www.moneychimp.com/art...)
And yes, I know this calculator is a bit Fisher-Price, but it gives a rough idea of value.

Good luck everyone.