Bull/Bear Report - Will the Sun Keep Shining on LDK Solar (LDK)?
LDK Solar (LDK) has been in the news a lot this week, announcing three new sourcing deals - two long-term wafer supply contracts and a Polysilicon sourcing agreement to last through 2011. The stock has been on tear lately too, up over 50% from March 12 through yesterday's close. But does that mean you should buy the stock?
With LDK we have a stock that has been on a roller coaster from day one. Shares have vacillated between 20 and 75 from its IPO birth in 2007. If you're confused or queasy I would understand completely.
How in the world do you value something like LDK? There are many ways, but none that are all that reliable. For the most part the huge volatility in the stock suggests that LDK is more of a trading vehicle instead of an investment.
That being said there are some interesting investment reasons for owning a stock like LDK. The prospect of solar as an alternative energy source is compelling in and of itself.
Bull Case - Don Barrett
Don likes LDK for now, but thinks there could soon be stiff competition on the horizon.
LDK is 1 of many players in the solar energy field. With the rapid increase in oil prices solar power is again on the front burner. There is no doubt solar will play a part in our future energy sources. But, how much and when is up to the solar companies such as LDK and when the cost basis for solar power is comparable to the public utilities energy cost.
Solar power has been used in the most basic application for centuries. Early civilizations learned to turn their homes toward the direction of the sun to take full advantage of the suns warmth and lighting. The first solar cell was made back in 1883. Solar water heaters were used as early as the 1890s, but faded when electric and gas became available.
Solar power generation has increased from 49 MW in 2002 to 314 MW in 2007 in the U.S. A MW of energy will power 778 normal households for a year. So as you see solar power generation has increased but still provides less than 1 % of total energy consumed in the U.S.
As I stated earlier the biggest challenge for solar companies is to lower the over all cost for solar panels. Most panels are made of silicon which has remained high and at times a supply of silicon may be unavailable due to tight markets. LDK and most of the major solar cell makers use silicon currently, but I think they will have to move away from silicon based cells to become a major supplier of energy.
LDK is looking for sales of near a billion dollars in 2008. In the 4th quarter of 2007 LDK netted 49 million or 44 cents per share. LDK has already sold all of their 2008 production and 90 % of their 2009 production. Most companies such as LDK are coming on line with higher production levels as quickly as possible.
Another major player in the solar arena is FS or First Solar. FS thinks they can compete with traditional electric producers on a cost basis in 2-4 years. But, FS is almost strictly for commercial applications, so home owners will be mostly left out, at least for now. FS is also expecting sales of near a billion dollars in 2008. FS net income grew from 4 million or .07 cents a share in 2006 to 158 million or $2.03 in 2007.
It's hard to argue with the success of some of the current solar panel makers such as LDK and FS. I think the winner will be the company that moves from typical silicon wafers to some of the newer wafers made from another material and the thin cell wafer.
HelioVolt is a private company that makes a cell called CIGS. It is much cheaper to make and it avoids another high cost of solar panels-installation. HelioVolt has a process by where they print the cells onto materials such as glass and other building materials. If HelioVolt can develop a system of panels printed on glass or maybe your shingles or metal roofing, they will revolutionize the solar industry.
The solar companies such as LDK due to their tremendous growth and demand look like short term investments But, the company that can mass produce panels incorporating the technology such as HelioVolt is using will make solar energy affordable for the masses. So if you invest in LDK today, look over your shoulder as something much more efficient and readily available will be out in the near future.
Bear Case - ahknahten
LDK is a strange company to analyze. In the past year the stock has fluctuated from $20 to $77 and the volatility alone has been quite remarkable. When I made a valuation model in eVal, I found a price target for LDK of $44, but that assumed that the company could keep growing at least 38% for each of the next 5 years. Is that reasonable? If I dropped the sales growth to 10% in the 3rd year, I got a price target of $22. Is that reasonable? In some manner the company has a low PE and an alright price/book, but from another angle, I get concerned with the price/cash flow and high accruals. The accruals play a role in providing a high f-score to the LDK stock. In my virtual funds, I have gone neither long, nor short on it. I really think there are much better information technology/semiconductor plays out there. Note -- I haven't even mentioned the word 'solar' yet. This past week at the University of Dayton they had a RISE conference, and quite a few economists/strategists were bullish about alternative energy - and although some like the solar story, I'm not confident yet at entering that particular boat. This stock makes me feel a bit queasy, and for that reason, I'm going to say 'short' to LDK. Pick something else, this stock seems more like a 'gamble' to me.
Funny Case - Tom Armistead
I did a lot of work on LDK: I analyzed the company in depth and from there I went on to review the entire solar industry. After completing my review, rather than make the call one way or the other on LDK, I would strongly recommend a smaller, but potentially more rapidly growing competitor: China Solar Titan (CST).
CST has a unique, patented method of converting Metallurgical Grade Silicon to the higher purity solar grade. To give you an idea of the importance of this process, please consider the following: Metallurgical Grade Silicon (98.5% pure) costs $1 per kg, while solar grade (6N, meaning six nines - 99.9999 pure) costs $200 per kg. CST's process is unique in that it does not rely on Trichlorosilane (TCS) and as such does not produce the pollutant silicon tetrachloride (STC). CST estimates their cost will be in the range of $1.19 to 1.91 per kg. There has been much environmental concern on these issues, as China is developing a reputation as a highly polluted country. The PRC is subsidizing CST because of the importance of their new, high and clean technology. Indeed, the academic work leading up to their process was performed at government expense.
The only drawback to the process is that it utilizes large amounts of electricity, approximately twice as much as the conventional methods. However, CST has a 40 year fixed price contract for low cost hydroelectric energy, reaffirming the government's commitment to make the process competitive. As an additional source of energy, they plan to set up a solar farm in the Gobi Desert, which will supply their power requirements by tapping the area's abundant solar potential.
CST recently announced that they have pre-sold 400 gigawatts of solar wafers under a 20 year, fixed price contract to a large and as yet unidentified South Korean firm. This represents 85% of their projected production for the period. Also, a source close to the matter has stated that they also are in the final stages of negotiations with a consortium of Mideastern investors who are developing alternatives to petroleum energy exports. Their pilot plant has been producing for three months and has only recently achieved the required degree of purity, producing 2,000 metric tons per month. Total Construction Services (TCSI) is supervising the construction of their plant, in a modern suburb of Shanghai, P.R. China.
A person familiar with the investment thinking of Warren Buffett has intimated that the Oracle of Omaha will be involved, estimating that his stake will be similar to what he took in China Natural Gas (CHNG). The source quoted Buffett as saying he liked the Kaching from CHNG and figured he'd play double or nothing. I haven't talked to Warren for a while, but I gave him a buzz to ask his opinion. He said "Tommy, this stock is hot! Go for it!"
Watch for the IPO
Tom
PS April Fools
All kidding aside, solar stocks remain a tricky business right now. During the first quarter of the year, investors pummeled the solar sector. As a group shares traded down a stunning 40% or more. Is the selling justified profit taking or is there something more at work here?
It would appear that the dreams of solar are being replaced with a remarkable pragmatism. Given the economic uncertainty in the United States, investors have rightly become more conservative. The solar story certainly looks attractive
At some point, and it may come with this next election, solar may take off. Oil prices at or above $100 has to have an impact at some point. Global warming is not waiting for us to make up our mind to change.
That promise of change has the potential to send LDK to higher levels. The question you have to ask yourself before investing is: Do you have the stomach for the ride?
Additional Resources on LDK Solar:
ToroandBruin - Liking or Leaving LDK
The Stock Surfer -- Solar Stocks: Making World Peace, One Multicrystalline Wafer At A Time
Stock Intelligence - LDK Solar Inc.
by Hillary Mark | 04/04/08 | Stocks: LDK,
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