Bookkeeping: Cutting LDK Solar (LDK) Exposure

Based on the (gross margin) guidance for 2008, I am cutting back on LDK Solar (LDK) - I still like this stock as a 2009-2010 story as its new polysilicon plant will help it to reduce costs substantially but it's a long road to get that plant up and running... this is now more of a 2009 story. The sector is up this morning on good earnings news from Canadian Solar (CSIQ) but unfortunately LDK Solar did not partake, and is down 6% this AM. Again the results and guidance is not terrible - we just have limited upside for the next few quarters, especially if LDK Solar comes in at the lower end of its full year guidance (23-25%) and with a management that said 26-31% less than 90 days ago, it's a bit concerning that they have lowered their expectations so meaningfully in such a short period of time. On the conference call, LDK Solar says higher costs are here for a few more quarters

• On a conference call with analysts, LDK executives said they expected polysilicon prices to remain high over the next two quarters.
• Executives said margins were pressured by both higher polysilicon costs as well as an increase in shipments of wafers under long term contracts, which have more favorable pricing for customers.

I am selling 350 of 650 shares in the low $35s to bring LDK Solar back down to 0.9% exposure (from 2.0%). If/when the stock shows relative strength and breaks back above its 200 day moving average I am willing to re-expand this position, but right now there are just easier short term opportunities in other spaces. If the stock pulls back to the low $30s (down 10% from here) I'll also consider adding this stake back. I anticipate this stock to be relatively range bound in the $32-$38 range for the foreseeable future - good for trading at least ;)

One day, when this polysilicon shortage subsides these names will have an easier time of it. But I'd rather have a larger investment when those headwinds subsist; between now and then it's going to be a tougher road to hoe for the companies which are not showing the same ability to offset the increased costs.

Looks like the analysts (who I usually disagree with) :) agree with me on this one

• In a client note, Goldman Sachs analyst Cheryl Tang said the company's lower margin estimate -- 23 to 28 percent from between 26 and 31 percent -- signal cost pressures throughout the year
• "We believe the management's reduction of gross margin guidance may disappoint investors," Tang said, maintaining her "Neutral" rating and $28 price target.
• Oppenheimer & Co. analyst Sam Dubinsky also singled out the company's lower margin estimates, saying rising polysilicon costs threaten to offset the company's higher revenue guidance. Dubinsky kept his "Perform" rating on LDK. On Monday, the stock closed at $37.46.

Usually I like to find stories where the analysts are wrong, and thereby profit from it, but in this case the analysts basically echo verbatim what I said yesterday. So I cannot disagree.

Long LDK Solar in fund; no personal position