I don't buy into the conspiracy theories that relentlessly pepper this (and many other) boards. I now believe that the volatility in LDK is largely due to the fact that analysts are divided down the middle on how to value the company.
Some, like Needham and UBS, are taking the position that it is a growth stock in a very hot sector, and are applying a multiple that supports their arguement.
Others, like PJ, Lazard, and Goldman, are taking the position that LDK is a commodity based business and are applying a lower multiple typical of these companies.
What everyone on this board must understand is that LDK is not comparable to the other solars like JASO, STP, SPWR, etc. LDK simply creates the polysilicon wafers that other companies use to create their products.
LDK is more comparable to WFR and REC in this regard. A commodity is a homogenous product across its industry. The lack of differentiation between LDK's product and the products of other wafer manufacturers is the reason their business is about the financials behind the process itself (procurement of raw materials, margins, etc).
Other solars can trade at higher multiples because they have the opportunity to come up with innovative products, unique marketing strategies, etc., that can dramatically impact their bottom line. LDK is limited to tweaking numbers within tight ranges in order to affect its bottom line.
I do agree with PJ, Lazard and Goldman in this respect. However, I think that accomodations must be made to their valuation models to account for the fact that LDK is growing at 80% per year compared to 30% for WFR.
None of them have appropriately addressed this. Granted WFR's margins are nearly twice that of LDK's because they produce their own poly. When LDK is capable of doing this (end 2008), we will see a complete revaluation of the company from all analysts.
One only needs a quick glance at the chart to see the verocity of this tug-of-war playing out in real time.
At the end of the day, the consensus always wins on Wall Street. As for LDK, this means a compromise between the value of growth vs. the value of commodity.
So where does all of this get us? It means the stock will remain wildly volatile for some time, until the pigheaded analysts each compromise to some extent, meeting somewhere in the middle. They both have very valid points, and therefore I cannot fully side with one team or the other.
I realize that I will break even or lose money if I am pigheaded myself.
I am willing to accept a lower multiple for LDK being that its business model calls for it, however, my estimates must include accomodations for their explosive growth. I do believe that Peng is highly motivated, extremely aggressive, and committed to creating the largest solar wafer manufacturing company in the world.
With the analysts so split, the stock will continue to be abused by traders, swinging from one extreme to the other.
I am committed to keeping my core holding because I strongly believe that earnings will trend higher for many years, and expect upgrades and new deals to create suprise advances in the stock's price that I don't want to miss out on.
I don't know exactly what draws me to LDK, but you must admit that this is one of the most watched stocks on the market. The LDK board has more posts than any other solar stock, despite its very short history. This leads me to believe that we haven't seen the last of the monster rallies or the monster declines. At the very least, LDK adds a lot of spice to my portfolio.
I believe that anyone committed to holding LDK for 12 to 18 months will come out far ahead once LDK's growth plan begins to become realized. Recent contracts are testament to the legitimacy of the company, and demostrate the insatiable demand for LDK's product.
If people are looking for maximum ROI, LDK is not the place for them. Upside is limited given their business model. Other solars have much more upside potential.
Listen to what Wall St. is telling you, LDK is damaged goods.
IMO LDK is high risk low reward.
I don't usually participate in these message boards, but I can't help myself tonight. If we look at 2008, I would estimate conservatively that revenues will be $1B which is a 100% increase from 2007 (this % is less than the analysts estimates which are 108%). If you assume a conservative estimate of 25% for gross margins you get $250M in gross profit. Assume expenses of $8M per quarter (up from $5.7 in this last ER)or $32M for the year you get operating profit of $218M. Assume FX of $4M a quarter (double what we had in Q3 which assumes twice as many sales in US$ and the dollar remains where it is today) and assume that interest income and govt subsidies offset interest expense your left with $200M in net income (no tax expense for LDK). Assuming 114M fully diluted average shares outstanding for the full year and you get $1.75 EPS for the full year. I don't think I could be more conservative with the approach I've taken. For a company growing revenue at 100%, a P/E of 40 is not excessive which brings us to a share price of $70. Let's be even more conservative and say the P/E is 30. That gives us a price of $53. How in the world could someone put a price target of $35 for this company??? Using my estimates, that's a P/E of 20!!! The PJ analyst in his report estimated 2009 EPS at $2.35. His $35 price target implies a 15 P/E for a company growing revenue at over 100%. This is insanity.
Most people agree with you regarding the valuation. What I don't understand, though, is that if LDK is really worth more than it's trading for, then why isn't it higher? You would think that for every downtick, there would be a value investor jumping on board. If the stock can drop as precipitously as it does, it means that there are not enough fund managers, hedge funds, individual investors, etc that agree that it's undervalued. If the market really is "efficient", why aren't the big money buyers stepping up to take advantage of the value?
I hear your comments and I agree with most of them. In the long run (mid 2008) the stock will be properly valued once LDK delivers their forecast and WS reaches a compromise in valuing LDK.
I posted this earlier, but feel compelled to post it again to easy some of the "conspiracy theories" flying around.
The stock dropped like a rock because they missed their Q3 margin number. They met their Q3 EPS because of higher revenues. So, if you think about it, LDK's profit margins were down for Q3 and therefore we should expect "Margins" to be down every Q thereafter. Until LDK proves to the investors that they can produce cheap wafers, margins are said to be in a down ward trent from 39%in Q2 to 30% in Q3 to xx% in Q4?. The analyst saw this and "assumed" that there will be further margin loses due to higher raw material costs. This is why it was so important for the CEO to have answered the "Cost" question during the call. I understand that he has secured 75% of the needed raw in 2008, but at what price? Will the secured purchase price bring the margings back to the 39% shown in Q2? I think his answer did not reflect that.
Profit Margins, not absolute numbers, matters for a startup company... they have not proven they can produce at constant costs. Do not surprise people during the call with higher costs..... never higher costs as we infer inmediately lower profit margins than projected in the coming quarters.
Will they meet Q4 Revenues? I think they will surpass the previous estimates they provided by perhaps by as much as 15%
Will they meet Q4 margins? Most likely NO!!!!! The street believes it will be lower than 30% "based" on the downward trend.
Will they meet Q4 EPS? Sure, but as a result of the added revenue. A growth company that can not control their costs can increase revenue all they want, but if thier "Contribution" margin does not hold, revenue might as well be the same as cost.
Is this a good company? Sure it is and has great things going for themselfs. However, the picture presented is one that I think it will take longer to obtain better margins and currently WS is not willing to wait that long or pay a premium to hold the stock ($71-$85 price range)
I am certain LDK will be a $100 stock company, but not until late 2008 when they prove to "all" investors and analysts that they did control their costs and contribution margins are in line with expectations.
I am holding a boat load at a $56 average price. I will have to HOLD and wait till Q2 or Q3 of 2008 to get it back. I hope sonner, but I know what WS is looking for.
This is my personal opinion based on what I read from the furnished Q3 results and CC.
Good luck to all and Merry Christmas
great post! your posts are among the most valuable posts, very objective. I actually hold tons of LDK shares, and today I lost almost a million, but guess what, I am not sad at all because I know LDK's future will surprise everybody. We will have our sunny days, very soon, and I firmly believe that LDK will be one of my best investment. Again thanks for the great post.
Maybe there is no conspiracy. But there are motivations other
than objective analysis behind most analysts.
Take Jesse Pichel at PJ. He is vice president of PJ.
1. Originally he had a buy on LDK and noted that even
without the new silicon plant, LDK is still a growth story. The silicon plant will be a big plus it can be on schedule.
2. After Situ sent him the allegation to him and he released to media, he still maintained buy rating.
3. He visited China after that and downgraded LDK to neutral
when he came back. Did he really go to China for the Situ
allegation? Not really, at least not his main purpose.
It was because due to LDK notified PJ of ending investment
banking service. His main goal to China was to retain that
business. (Though whether or it was a appropriate for LDK
to terminate the business due to PJ's behavior of releasing
Situ's allegation to media is a different story).
4. Is there any difference in his knowledge about LDK
before Q3 CC and after? Not at all. In the CC, his only
question was basically saying how I can trust you since
your competitor's margin is much lower than yours. After
the CC, he downgrades to sell.
Now take Needham. How much of strong buy rating and this
morning raising price target is because LDK gives the
banking business to Needham? I guess a lot. Do you
think Pierre Maccagno's visit to China was only for
the research of LDK? At most partially. He got the
banking business for his company.
You can also find different motivations from GS, Lazard.
The only one I haven't found its motivation is UBS.
Hopefully serving its client is the only motivation.
I respect their opinions but always trust only myself in
making investment decision.
Well, unfortunately, I am holding at a fair amount of loss here, but we'll see how it goes. One thing that I noticed said among some traders (desk traders) is they feel the company is a "scam." They seem to be in agreement with this for whatever reason. Gave no reason. So, I don't know. I simply own the stock and hope for better days.
I have one question for you.
If those analysts have so many things they are not completely sure about, why they need to be so hurry to make a SELL rating, and even give a $34.5 target price JUST BEFORE option expiration date?
I am surprised you missed this in your analysis.
So what you're saying is that they're a B2B company. No biggie, lots of B2B companies support high multiples! Valuation for young growth companies should be based on EBITDA, and even Goldman says EBITDA will increase 85% in 08!
it seems that you do not really understand
where the money is made and kept in the solar industry.
Here is the food chain:
polysilicon -> wafer -> cell module -> installation
polysilicon has the high gross margin (50+%)
wafer has the second highest margin (30+%)
cell module producer has the lowest profit margin
(-5% to 12%).
LDK is producing wafer and is going to produce mass
quantity of polysilicon (will be the largest in the world)
WFR has better margin than LDK right now because
WFR produce polysilicon now.
But WFR is only 10% solar (fast industry growth 40%), 90% semiconductor (slow growth 8%)
LDK is 100% solar (fast industry growth 40%, company has
100% growth for the next 3 years, and 80% growth for
the next 5 years.
Toxic, low efficiency FSLR is hot right now is primary because of shortage in multi-crytalline wafer.
Once wafer supply ramps up, FSLR will go under.
That is why industrial expert Q-CELL bet their
future on LDK.
The only risk LDK has is its polysilicon production
expansion may not be as smooth as expected.
So far, we do not really know. Based on its
past execution on wafer production, the LDK team
is very solid. That is why Q-CELL bet their future
I am stuck with LDK, from time to time I may trade it.
I will not trade FSLR, even if it drops 50% overnight.
No other solar play is uniquely positioned as LDK
with such a team determined to become the #1 producer
of polisilicon in the world.
Please also remember, LDK has 30% cost advantage compared
with its top competitors. 30% cost advantage in
manufacturing can knock down all its competitors eventually.
Also soalr industry has infinite potential. solar energy is
only about 0.04% of energy consumed. it can have high growth
(>40% per year) for decades.
I am betting money in solar!
Production capacity for next 3 years are all sold, plus 10 year contracts for LDK.
Just think about that. That has not happened to any industry before.
that is why I think Hinckley, Shrestha, Pichel are cheating
individual investors or are fools. either way i will believe in them.
It is odd that I have to thank them for giving me
the opportunity to buy LDK cheap.