19 February 2008

LDK Solar - LDK - A Zacks Top 10 for '08

I'm not surprised to see a trendy solar stock amongst the Zacks Top 10 for 2008, considering how First Solar (FSLR) climbed 700% during 2007.

With oil returning to the $100 level, it's a fine time to consider investing in alternative energy companies.

Stock #9: Industrial-strength supplier engineers dynamic growth. Strong margins, geographical diversification, and great management make for a winning combination.

Morningstar does not have an analyst report for LDK, but they are so kind as to present a succinct description of the company:

LDK Solar is a Chinese pure-play manufacturer of crystalline solar wafers. Solar wafers are the raw materials used by manufacturers of photovoltaic (PV) cells for the generation of electricity from sunlight. Wafer manufacturing entails the growing of silicon ingots in furnaces and slicing or "wafering" those ingots into usable form for solar cell makers. This positions LDK at the front of the PV food chain. Despite having only commenced operations in mid-2006, the company has quickly become the fourth largest supplier of polycrystalline wafers in the world and is on track to become the largest by the end of the decade.

Morningstar also offers up some attractive valuation numbers for LDK, like a PEG of 0.2, and a forward P/E of 8.9.

Without my M'star fix, I had to paddle out a little further into the interweb to learn more about LDK, and to flesh out the financial data.

First up, today, Chris Tyler from Optionetics.com reported on a Goldman upgrade:

In other stock news, LDK Solar (LDK) is struggling to keep some of last week’s upswing for the alternative energy sub sector to intact. The manufacturer of “multicrystalline” solar wafers was raised at Goldie to “Neutral” from “Sell” while also being removed from the banker’s Asia Pacific Sell List. Shares are up 1.50 at 35.84. Waiting in the wings, the group which includes First Solar (FSLR), SunPower (SPWR), Jaso (JASO) and MEMC (WFR) will have a potential earnings catalyst from one-time or sometimes growth upstart Suntech Power (STP), which reports tomorrow morning.

Bloggingstocks.com noted an earlier upgrade of LDK on January 9, 2008:

CIBC upgraded shares of LDK Solar (NYSE: LDK) to Sector Performer from Sector Underperformer following a meeting with management as they have greater visibility on polysilicon supply for 2008 as well as comfort that average sales price declines will be lower than previously expected in 2009.

Here are links to some pump-action from Seeking Alpha's David White here, here, and here.

Click on the links if you're interested. According to the disclosure on Seeking Alpha's website, the author has been long LDK while writing each of those pieces over the last three months. A skeptical reader should also consider that over the last three months, LDK moved from $27 to $75, back down to $30, and is now trading around $35.

I counted 72 posts regarding LDK on Seeking Alpha, including the three David White posts. That's a lot of commentary on a young company with a volatile stock in a red hot sector.

For a more reasonably bullish approach, read this piece by Zachary Scheidt.

For a growling, as opposted to snorting, perspective, here's an excerpt from a skeptical outlook on LDK from Stephanie Grimmett:

A former employee told reporters that a large portion of the company’s inventory was actually junk, waste silicon that LDK had no way to process into new wafers.

LDK denied the accusation (at one point the solar cell company even made the claim that just because it couldn’t process the silicon right now, it didn’t mean it wouldn’t develop the technology in the future). And LDK brought in an external auditor to prove it was telling the truth.

As is usually the case in a Wall Street scandal, the actual truth is less important than a few soothing words and a nice soft-shoe to make investors feel better about the situation. And that’s what LDK gave us.

The external auditors swore the solar cell company had just as much silicon as it had claimed. And the stock soared on the news, without anyone mentioning whether or not LDK could do anything with that silicon.

LDK still hasn’t proved it can turn any of that waste silicon, which includes defunct wafers sold as garbage and ingots too impure to be processed by other solar cell producers. But maybe we weren’t supposed to notice that.

If LDK can’t use its recycled silicon, if that former employee was right, then the company’s only advantage is its cheap Chinese labor. Don’t get me wrong, we’ve built plenty of fortunes on a pure-play outsourcing deal.

But that cheap labor doesn’t make up for LDK’s lack of processing know-how. And it won’t prevent the company’s profit margins from continuing to fall as silicon prices grow at an alarming rate in the next few years.

Silicon is already incredibly expensive compared to prices even a few years ago. And solar cell and semiconductor manufacturers are already preparing for a probable shortage. Companies are setting up contracts for silicon years or even decades in advance, as if the stuff was… oil. And as technology puts computer chips in more and more devices in our everyday lives, don’t be surprised if silicone becomes as precious a commodity as oil.

In that environment, I don’t trust a new kid on the block with nothing to recommend it but inefficient business practices and penny-a-day labor.

If you want to grab some gains in the short term, go ahead and jump into LDK Solar, but be prepared to jump back out again within a few months or weeks. If you’re looking for a long-term investment, don’t put money into the stock. It’s not a durable competitor in the silicon wafer industry.

LDK seems to be a bold pick amongst the Zacks Top 10. Its financials and recent stock price scream value, but there are challenges to comfortably buying and holding this stock. These challenges to understanding LDK include the need to filter the cacophony of commentary on this stock and stomaching the extreme reactions on this company's news. And then there's the trust and transparency issue with a young Chinese operation.

LDK could be a great investment, especially a short-term one, but I'm not convinced its value and growth combo fits with the Zacks Top 10 thesis of buy, hold for a year, and forget.

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