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LDK Solar: Now Bottoming?

by: David White September 29, 2008 | about stocks: LDK    

David White

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Energy is generally down in a down market right now. Virtually all solar stocks have gone down in sympathy with this downtrend. If this trend is still in place, why buck it? There has to be a good reason.

In LDK Solar (LDK), there does seem to be such a reason (or many such reasons). Its 52 week low was $19.64. However, that was when there was still substantial negative sentiment about LDK’s books. With the nearing of LDK’s polysilicon production, those worries have decreased dramatically. Further, LDK has begun UMG polysilicon manufacturing, which also decreases such concerns.

Moreover, LDK’s previous low this year was also before the most recent quarter’s sterling EPS figure of $1.29. LDK is unlikely to see $20 this time. Rather its current price may be very near its low in the near term.

  1. LDK has great current numbers for a high growth stock:
    • PE = 12.3
    • FPE = 7
    • PEG = .32
    • Current Price $30.06
    • 1 yr. target price = $50.38
  2. LDK is making moves that should substantially raise its margins:
    • LDK is building two polysilicon manufacturing plants. When these come online in the near future, they should decrease the price LDK is paying for virgin polysilicon dramatically. The greater amount of virgin polysilicon should allow LDK to blend some of its now infamous second quality polysilicon ingots with the high quality virgin polysilicon. The fact that they will not have to accumulate this in stock should help the bottom line.
  3. LDK has long term contracts for of its production:
    • LDK has all of its 2008 production already sold. Ditto 2009 at fixed prices.
    • LDK has substantial long term contracts at relatively fixed prices that extend out many years, and they have been signing more. LDK recently signed an 11 year agreement to process up to 5 gigawatts of multicrystalline polysilicon for Q-cells. They signed an 8 year agreement with Sumitomo to supply 750 megawatts of multicrystalline solar wafers. They signed a 5 year agreement with SolarTech Energy Corp. to deliver 550 megawatts of multicrystalline wafers. Those are just the agreements they have signed this month (up to 6.55 gigawatts).
  4. LDK raised its 2009 production and revenue estimates recently. It raised its production estimate to 1.45 to 1.55 gigawatts. It raised its revenue estimate to $2.8 to $3.0 billion dollars. The analysts estimates for EPS still seem to be based on the old production and revenue estimates. Currently the margins are running about 25%. Some have predicted the margins will rise to 40-50% as the polysilicon plants come online. Manufacturing of UMG polysilicon should also help. For 35% net margins, 2009 EPS will be approximately $8.60 (PE = 3.53). For 30% net margins, 2009 EPS will be approximately $7.37 (PE = 4.11). For 25% net margins, 2009 EPS will be approximately $6.14 (PE = 4.94). It is hard to imagine a scenario in which LDK’s margins would be lower in 2009 than they are in 2008.

LDK has been very conservative in its estimates since the lawsuits last fall. One has to believe the revenue and production estimates are extremely conservative. If the world economy implodes, all bets may be off. However, barring that, LDK looks like a great opportunity. If we are near the bottom of the bear market, LDK is a great opportunity!

If we are not near the bottom, LDK may still soon begin to buck the trend. Its fundamentals are that strong. With its long term contracts, it is a great stock to ride out the economic slump in. Further it is diversified geographically. It sells to many countries. It is not heavily tied to one or two or three countries. It will take a widespread failure to substantially effect LDK. It's a buy at its current price.

Disclosure: Author holds a long position in LDK

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This article has 12 comments:

  •  
    Sep 29 01:38 PM
    I'm not sure whether I left it out or SA did, but I meant to include a significant point about UMG. It uses a much less pure polysilicone. This is about 1/10th the cost of the high purity polysilicone used for multicrystalline wafers. This should reduce LDK's cost (increase margins). Also LDK should be able to use much of the scrap it was throwing away to help it produce UMG polysilicone wafers. The fact that this scrap no longer needs to be waste should also help margins.
    Reply
  •  
    Sep 29 02:18 PM
    What are your thoughts about the US senates reluctancy to extend the tax benifits on solar energy. What is the impact from this on L.D.K isolated ?
    Reply
  •  
    Sep 29 03:30 PM
    I think I would have greater faith in your commentary if you knew the difference between silicone (which is a type of rubber) and silicon (which is an element that is used to make solar cells).
    Reply
  •  
    Sep 29 07:34 PM
    The alternative energy play is dead.

    Oil is well off its highs, and the market has discarded the sector. Alternative energy is not as cost effective as fossil fuels. Point Blank.
    Reply
  •  
    Sep 29 09:19 PM
    Comments here are well reflective of this market environment: nobody's bothering to actually analyze any actual ideas, everybody instead relying on one-sentence drivel (CWolfe: "You made a typo so I just stopped reading", K. Bofah: "Oil is going down and I only buy what is going up so I didn't read it either")
    Reply
  •  
    Sep 29 11:31 PM
    LDK will continue trending down with oil but is probably a good long term play, ENER is a better company though. America should cut taxes on alternative fuel companies. The tech boom would pop us out of recession and on to our next wild ride. Oil prices would plummet and Iran would no longer be an Issue.
    Reply
  •  
    Sep 30 10:10 AM
    what about the need to address global warming? with cheap oil global warming is not a problem which needs to be addressed? someone please comment
    Reply
  •  
    Sep 30 01:28 PM
    K. Bofah is so wrong. Oil and other fossil fuels can only go up in price as time goes by. Solar energy costs are falling rapidly and efficiency of solar cells is rising rapidly.
    Oil is in fact killing our economy. We give over $80 billion in tax credits and subsidies to oil and gas companies, according to setamericafree.org. Their estimates of the hidden costs of oil are over $800 billion annually. The includes over $100 billion for military protection of oil shipments, environmental damage to health, infrastructure and the environment in general.
    Health costs alone are estimated at hundreds of billions of dollars. Solar is already cost competitive in sunny high power cost parts of the country and will be competitive all over the country in the next ten years. One company, Nanosolar says they can already build a PV solar system cheaper than a coal fired plant can be built, and will never need any fuel, ever. No fuel to mine, transport, store, burn, or clean up the mess from. No fuel that anyone can corner the market on. According to a proposal published in Scientific American, we could power the whole country just using solar power plants in the southwest desert areas. They are talking about 1% of our deserts, less area than now used for coal mining.
    And they say it can be done, spending less in public money over 30-40 years (about $400 billion) than we spent to build the internet over the last 35 years. And spending way less than we now give oil companies in tax credits and subsidies. Like 1/8 as much. We are giving them that much every 5 years!!!
    There are conservative forces filling the news media with disinformation about both global warming and what the real potential for renewable energy is. It has to be one of the biggest propaganda campaigns in history.
    They keep trotting out phony lists of skeptical scientists, trying to convince the public that there is no scientific consensus on man made global warming. In fact, the IPCC's 4th assessment on the science of climate change is the most thoroughly peer reviewed scientific document in the history of science. Their findings are supported by every major scientific organization in the world, including the EPA, NOAA. NASA, The Academy of Science, The American Geophysical Union. Dr James Baker of NOAA says that AGU or anthropogenic global warming has more scientific consensus than any scientific theory he knows of, with maybe the exceptin of Newton's second law of dynamics. But go to the Minnesota Republican website and you see big bold banners at the top of the page claiming that AGU is a scam. Talk about Luddites!
    Maybe you heard of Senator Inhoffe, R OKA, the leading global warming skeptic in the senate, touting his list of 400 skeptical scientists. It was a complete joke. A padded, laughable list of non scientists, TV weathermen, celebritities, etc. Then you have the announcements of "scientific conferences" like in New York, where supposedly 1500 or so skeptical scientists met. Another phony list. These meetings couldn't be further from a "scientific conference". They or orchestrated propaganda events where right wing propaganda mills like the Heartland Institute "bribe" attendees with offers of $1,000 per speech and $10,000 per paper. These are all expenses paid junkets, that in no way resemble real meetings of scientists, who are never have their expenses paid, and who in fact seldom are even paid for their research. Now we have the #2 man at GM claiming to have a list of 32,000 skeptical scientists. I'd like to know where he gets these numbers, since there aren't enough climate scientists in the world to have that many skeptics, on top of the 99.9% of actual climate scientists who agree with the IPCC


    Reply
  •  
    Sep 30 01:33 PM
    I would like to add the words of one climate scientist, who said that if 1% of the climate scientists in the world took the above mentioned bribes from the Heartland Institute, you would have about 200 skeptics. He says 200 skeptics haven't shown up yet. Are you starting to get the idea?
    Reply
  •  
    Sep 30 07:33 PM
    I would like to point out the US tax credit for alt energy is a small issue with LDK. The US accounts for 9% of LDK sales, Europe 20%. The rest is China and other Asian countries.
    This information is available in the LDK July 2008 analyst day presentation slides on the company website.
    Reply
  •  
    Oct 13 01:58 AM
    Well, LDK didn't bottom higher because it continued down with the rampant across the board selling in the stock market. When a lot of people redeem their mutual funds, there is going to be a lot of selling of LDK because a lot of mutual funds are invested in it. Naturally this causes the price to go down. The good news is that it is an even better bargain now than it was before (PE = 7.4, FPE = 4, PEG = .16). It seems likely that the market may have bottomed for the near term. The futures are up today (Sunday Oct. 12). The VIX spiked above 70. There must surely be a limit somewhere? Apparently Jim Cramer told everyone to sell all of their stock on a national TV show. We can all blame him again (partial sarcasm). Seriously, there is good support for the SPY at the $82 and $85 level. The market made it down to slightly below $84 on the SPY last week. It seems to have bounced off this major support area. We will know more as the week wear on. However, I expect that some of Mr. Bernanke's and Mr. Paulsen's actions will start to be felt positively in the market over the coming weeks. This should allow the markets to go upward for a change. I am hoping for the best. LDK looks like a great long term investment. To me it also looks like it may do great over the short term also. If the markets rise in the next couple of months, LDK should outperform.
    Reply
  •  
    Oct 13 02:00 AM
    For those of you who don't know, the U.S. Congress extended the solar tax benefits for many years to come when they approved the bailout bill.
    Reply
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