LDK Solar (LDK) Crunches Estimates

As I said in our earnings preview for the week

LDK Solar (LDK) - complete crap shoot with any of these solar names around earnings. The sector is out of favor is the overriding theme. In the 2 years or so I've been in these stocks this is the longest I can remember absolutely no rally in the group.

You just never know with these guys - they can be up 25% or down 25% within minutes of their earnings report. In LDK Solar's case it's "up" (20%). The chart did not signal much before hand...
We don't own a major stake since we've taken a basket approach to the sector so we won't benefit much but it's nice to see news to the positive and hidden within the outstanding numbers are some other good news items. I continue to find valuations in this sector, for those of you who believe in P/E ratio to growth, as simply absurd but that has not stopped the stocks from a continued selloff and general abandonment.

LDK Solar earned 82 cents versus the Street's estimate of 42 cents. So the $1.70 2008 estimate immediately jumps to $2.12 and obviously one can argue next quarters 41 cent estimate looks silly as does the 50 centish 4th quarter. There is a good chance for $2.75 in earnings in 2008 for LDK Solar - even taking into account the $40 price tag in after hours that is under 15x forward earnings if the $2.75 is good. If you go with analysts ($1.70 + $0.40 beat) = $2.10 the forward PE ratio = 19. For triple digit growth. Instead people are flooding into retailers and restaurants (and autos and airlines and financials) for similar PE ratios... for 1/10th the growth. Because thats what the quant hedge funds say is "the truth".

• LDK Solar Co Ltd (LDK) on Monday posted quarterly earnings that blew past Wall Street estimates as a manufacturing capacity expansion allowed the company to sell more solar wafers, sending its shares up 19 percent in extended trade.
• LDK's second-quarter revenue was $441.7 million, well above the company's May forecast of $278 million to $288 million. (I'd say)
  
• Second-quarter net income rose to $149.5 million, or $1.29 per American Depositary Share, from $49.8 million, or 45 cents per ADS, a year ago. Excluding the change in fair value of prepaid forward contracts, the company earned 82 cents a share, according to Reuters Estimates. Wall Street analysts had been expecting earnings of about 40 cents a share. (actually .42 per Yahoo?)
• Gross profit margin for the second quarter of fiscal 2008 was 25.4% compared with 27.7% in the first quarter of fiscal 2008 and 35.2% in the second quarter of fiscal 2007. (don't like this trend down but it should be transitory before a major expansion in 2009/2010)
  
• In recent months, however, investors have shunned solar stocks due to fears that an expected pullback in Spain's generous solar subsidies could hamper demand. (as we know the whole world revolves around 1 country) ThinkPanmure analyst Peter Peng said much of the second-quarter demand for LDK's solar wafers likely came from Spanish solar system installers who are scrambling to finish projects before a cap on subsidies goes into effect. (and here we go with the Bad News Bears)
• "There is a pull for the Spanish integrators to get projects in by September, but even beyond that most of these solar companies are seeing very, very strong demand for 2009," Peng said. "There is a possibility that Germany, Italy and potentially France and other smaller markets could offset the loss of market size in Spain." (nice words from an analysts - I'm floored)
• Average selling prices on the company's products were up 10 percent from the previous quarter, as it was able to pass along the high cost of their main ingredient polysilicon. (as Paris would say "that's hot" - and surprising)
• LDK also began selling wafers made from upgraded metallurgical silicon during the quarter, ahead of schedule. Upgraded metallurgical silicon is less pure, but also less costly, than standard electrical grade silicon. (very positive)

Outlook Change - the variance is laughable in magnitude

• LDK raised its full-year revenue outlook to between $1.65 billion and $1.75 billion. It had previously expected revenue of $1.08 billion to $1.18 billion for 2008.
• For the full year, LDK said wafer shipments are expected to be between 750 megawatts and 770 MW, up from a previous forecast of 560 MW to 580 MW for the year.
• The company's 2008 gross margin forecast was unchanged at between 23 percent and 28 percent.

Plant Update

• LDK said construction of its polysilicon plants remained on schedule.
• LDK said it was on track to produce between 100 tonnes and 350 tonnes of silicon in 2008, and next year plans to produce between 5,000 and 7,000 tonnes.

Polysilicon Costs

• LDK Chief Financial Officer Jack Lai said on a conference call with analysts that the company's silicon costs should improve in the fourth quarter. (that's very positive since it weights on these stocks like a piano)
  

Look, if restaurant stocks and clothing stores deserve forward P/Es of 16-19, I don't care if oil goes to $60 - much of the rest of the world moves to alternative energy because they don't want to be in the same pickle the U.S. has now twice put itself through (1970s, late 2000s). This company is (with no growth from this quarter) going to put up a $2.75 year - so let's call it $3. By simply putting a "clothing store" P/E ratio on it you are talking mid 50s. But companies growing triple digits generally get higher P/E ratios than companies selling sandwiches, at least in the market I grew up in. But maybe not in this era. If you dared give a company which can grow 30-50% year over year for the next 3-5 years a PE ratio in the mid 20s, you'd dare to dream of $75. I know, it sounds crazy - I come from the old school where earnings actually drove stock prices. Maybe one day humans will win out over computers again.

The most direct parallel to LDK Solar is ReneSola (SOL) which should benefit directly from such fantastic results. SOL is trading at a whopping 11x forward estimates. But this whole sector tends to trade together so perhaps its just a moot point - throw a dart. That's what the market does.

[Jul 2: Restarting LDK Solar]
[May 12: LDK Solar - Good Earnings but Worrying Margins]

Long LDK Solar in fund; no personal position