ZachStocks

After spending most of the summer in the dark, the solar industry is seeing a ray of light today after an earnings report from LDK Solar Co., Ltd. (LDK). The stock is currently up about 19% on the day and related companies such as Trina Solar Limited (ADR) (TSL), and ReneSola Ltd. (ADR) (SOL) are catching a bid as well. The industry-wide strength is a welcome change since declines in energy prices and disappointing news out of Spain sent prices lower last month.

LDK reported revenues of $441.7 million which is 89.2% above last quarter and an impressive 346% above the second quarter last year. Earnings were recorded at 1.29 per ADS which may be a bit misleading. The company actually had a one time profit of $60 million due to a one time sale of materials, but even if you back out this sale, the earnings were roughly 77 cents per ADS which represents a 108% gain over last year. Management pointed out that it has now signed 9 long-term supply agreements this year which helps in diversifying the client base. The target for annualized capacity was also raised for this year (to 1.2 GW) as well as 2009 and 2010 (2.2 and 3.2 GW respectively).

If there was a dark spot in the announcement, it revolved around gross margins. Although average sales prices were higher than most analysts expected, the cost of polysilicon (or poly) continues to be high. Gross margins came in at 25.4% which compares unfavorably to 27.7% last quarter and 35.2% a year ago. Management stated that they expect margins to continue to show weakness in the third quarter before rebounding in the fourth quarter and into 2009. The change should be due to in-house production of poly which will allow the company to produce material below current costs on the market.

This production of poly is the most controversial issue in the report. Analysts appear to be skeptical as to whether LDK will actually be able to ramp production into the end of this year. production of poly is a difficult process and competitors have faced delays when implementing similar projects. Any delay in LDK’s plans to product raw materials would likely be a disappointment to investors. But the positive side of this argument is that if production goes according to plan, the likelihood for further appreciation in the stock price is very good.

Demand for solar wafers continues to be strong even with decreasing subsidies out of Spain. It appears the private marketplace is ready to step in and pick up the slack in demand that may have been released last month. With lower prices on most solar wafer producers, there should be ample opportunities to pick up strong investments at discounted prices. I believe LDK is one of those opportunities.

LDK Notes

FD: Author has a long position in LDK

Additional Reading:

Trader Mark reviews LDK’s Earnings

Barrons Tech Trader with a quick bit on the announcement