Here's 1 Reason LDK Solar Looks Weak

Margins matter. The more LDK Solar (NYSE: LDK  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers and any trend that may tell me how strong LDK Solar's competitive position could be.

Here's the current margin snapshot for LDK Solar.

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

22.1% 14.1% 3.0%

Source: S&P Capital IQ. TTM = trailing 12 months.

Unfortunately, the latest numbers don't tell us much about where LDK Solar has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for LDK Solar over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 39.3% and averaged 24.9%. Operating margin peaked at 35.2% and averaged 19.3%. Net margin peaked at 28.6% and averaged 10.1%.
  • TTM gross margin is 22.1%, 280 basis points worse than the five-year average. TTM operating margin is 14.1%, 520 basis points worse than the five-year average. TTM net margin is 3.0%, 710 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, LDK Solar has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at LDK Solar? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (0)

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  • Report this Comment On January 06, 2012, at 4:49 PM, zhuubaajie wrote:

    But the author is missing some very important points. Chinese entities simply cannot be analyzed like Western ones.

    LDK has created lots of capacity in the last few years, and actually will be using them fully in the years to come.

    1. The game has completely changed - with the recent announcement of the US$64 million in China bank project financing for LDK (actually for its 70% owned subsidiary), to build 2 utility scale projects in California. What has been holding back U.S. expansion plans was the lack of project funding. Now that the floodgate is open, expect to see at least $5 - 10 billion of Chinese project financing deployed in the next decade, and all of that going to the Chinese solars, LDK being one of the biggest beneficiary.

    WHY do you think the big boys were buying up LDK in recent months?

    2. LDK is a favored recipient of policy loans from Chinese banks, which helped to fund the expansion in adversity. Chinese banks, especially the policy banks, do not lend lightly. But once they lend, they act as business partners (unlike American banks, which only lends you money when you don't need it, and would pull the rug faster than anyone else if it rains). It is a truism, but also happens to be true, that major Chinese companies treat bank loans like equity. The stability allows the borrowers to weather all sorts of inclement economic downturns.

    It is no different from the Japanese companies staying unprofitable but having access to virtually unlimited financing - the profits will come as long as the market shares are locked in; it just takes patience.

    Other bloggers have argued that American solars with prettier balance sheets and higher margins are the ones to own, and talk down the Chinese solars. I predict that ALL of those high priced (anything with a P/E higher than 10 today) will not exist in 5 to 10 years.

    (I do own LDK, so I hope that my predictions are correct.)

  • Report this Comment On January 06, 2012, at 4:53 PM, zhuubaajie wrote:

    Treasuries give 2.5% returns?

    A well crafted utility scale project can provide the lender up to perhaps 6% returns for 15 years. Add to that the mandate for aiding exports, it is clear that the LDK management has very ambitious long term plans.

    Think gigawatts. Think the likes of CIC joining the fun once the policy banks showed them how it is done. 6% is less than the 11% that CIC got in 2010, but these projects are also a lot more stable than the equity investments.

  • Report this Comment On January 06, 2012, at 6:34 PM, Tridelphia wrote:

    Well said zhuubaajie! Just another Fool bashing Chinese solar..Although in fairness to the author the presentation of facts was well done! You are correct, the average investor doesn't Get it when it comes to understanding the Chinese philosophy of success! As far as I'm concerned LDK is a much safer investment than any American solar and yes I'm invested in LDK as well...

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