LDK Solar Company (LDK) reported earnings this week and as expected the numbers weren’t pretty.  The company had already pre-announced weak revenue and shipment figures which were lower than previous guidance.  So it comes as a bit of a surprise to me to see Piper Jaffray issue a sell recommendation this week after the announcement.  LDK has traded from a high above $50 less than six months ago to a current price below $5.  To issue a sell recommendation at this point seems an awful lot like closing the barn door after the horse is already in the next county!

Now to be fair to Piper, there was more information released in this report, so maybe part of the information spooked them even more than the deteriorating environment we saw in the fourth quarter and in the last 2 months.  The company took a substantial write down in inventory (similar to competitors) as the price of solar products has plummeted in recent months.  The gross margin for the quarter was negative as LDK grappled with sharply lower sales prices and inventory that was still overvalued.

But the most important thing about this week’s report was the forward guidance which I found to be moderately encouraging.  First of all, the company exited 2008 with a strong liquidity position.  I mention this because one of the key complaints Piper had was a deteriorating balance sheet. LDK actually has $255.5 million in cash and another $83.4million in pledged bank accounts.  In addition the company has access to unused credit facilities of $850 million.  And finally, LDK is pairing back its capital expenditures this year to specifically concentrate on ensuring their strong capital position.  So it seems risk regarding capitalization may be exaggerated.

Business activity for 2009 should be flat to slightly higher.  Management is guiding revenue to be $1.4 to $1.8 billion compared to 2007 revenue of $1.6 billion.  Typically, managers will be overly conservative on these figures (especially in this environment) in order to give them some room to beat expectations.  So I would be very surprised if revenue came in below 2007 levels.

The company is expecting to ship 1.2 to 1.45 GigaWatts of product during the year.  That’s pretty healthy for a company that currently has annual production capacity of 1.46 GW.  And it’s also helpful to note that with new supply agreements signed in the last year, LDK has a long-term backlog of 14 GW that will be delivered over the next 10 years.  So while today’s economic picture certainly pressures business, the long-term outlook is still very strong.

Much is being said about the company’s polysilicon production plant.  This plant will allow the company to produce the raw material necessary for solar panels.  But the process is tedious and many solar companies have been unable to successfully produce polysilicon.  LDK has succeeded in production with a smaller test-plant and it appears the new plant is on schedule to begin production at the end of the second quarter.  The production of poly will allow the company to have a lower cost structure and is in part responsible for the 12 to 19% gross margins expected for 2009.

Now it’s clear that my support of LDK and other solar names has been pre-mature as the current financial crisis has had a much larger effect than I anticipated.  But the macro picture is still strong for this industry – possibly even more robust than before.  With the new administration earmarking billions toward renewable energy, solar energy will certainly benefit.  Some under capitalized names in the industry will not have the stamina to ride out this crisis.  But the ones left standing (and LDK certainly stands above many peers) will have the benefit of government stimulus and low costs on their side.

I continue to like LDK at the current price and believe market fear has much more influence on the stock than fundamental prospects.  Psychology must always yield to fundamentals but the timing can be extremely difficult.  We’ve all heard the phrase “the market can stay irrational longer than you can stay solvent.”  That’s why every position should be sized with care, and diversification (with both long and short exposure) will yield more stable results.  In two years I expect this stock to be trading between $20 and $40.  Building positions at this level could yield tremendous profits.

FD: Author does not have a position in LDK
LDK Notes
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