This Solar Company Is in Trouble

First-quarter earnings season is about halfway over, but we are still rounding out 2011's earnings report from the solar industry. LDK Solar (NYSE: LDK  ) delayed its earnings report to make sure it got its writedowns right, and boy were they bad.

During the fourth quarter, LDK's revenue was down 11% to $420.2 million, and net loss was $588.7 million, or $4.63 per share. Gross margin, a proxy that shows how competitive a manufacturer is, was -10.1% even after you strip out a $232.6 million writedown. These numbers were absolutely awful, but it gets worse.

Management's outlook for the first quarter, which has been over for a month, is for revenue of $190 million to $230 million. This should lead to another huge quarterly loss. Somehow, even after a terrible first quarter, management expects to post over $2 billion in revenue during 2012.

Careening toward disaster
LDK Solar has long been on my short list of solar companies that won't survive much longer, and this earnings report is further proof why. The company can't even sell the product it makes above cost, and with $2.2 billion in short-term debt and $900 million in long-term debt, the sun is setting on this manufacturer. Funding from China is keeping it afloat, but I wonder how long that will last when there are better investments for the Chinese government to make right now.

What now?
LDK is underperforming even the worst names in solar right now. JA Solar (Nasdaq: JASO  ) , which also supplies cells to manufacturers, is clinging to a slightly positive gross margin. Suntech Power (NYSE: STP  ) , which can almost match LDK's debt, has posted some of the best gross margins in the business and is one of the companies that may emerge after consolidation.

A buyout of LDK isn't even likely at this point. High-cost manufacturing capacity is leaving the market quickly, and I don't see Chinese manufacturers being eager to add more capacity when the capacity they have is underused. I don't see how this could end well for LDK.

A note to solar buffs
I will be covering Greentech Media's Solar Summit 2012 starting tomorrow. I will be tweeting live @FlushDrawFool, and there will be coverage of the events, as well as interviews, in the coming days on Fool.com. Send me a tweet, email, or message in the comments section below if you have questions you want me to ask industry experts. Check back for updates.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2012, at 10:07 PM, art005 wrote:

    So how do you think the stock climbed to $3.50 today?

  • Report this Comment On April 30, 2012, at 11:36 PM, TMFFlushDraw wrote:

    I don't have a good explanation. There was a volume spike early in the day, which could have been short covering.

    Give it a few days to tell what the market really thinks.

    Travis Hoium

  • Report this Comment On May 01, 2012, at 9:31 AM, Onigato wrote:

    Admitedly, solar is not having a good year at all, and Chinese solar is having an even worse year, but this last report is a full quarter off, and full of writedowns.

    Writedowns may not be like depreciation, but it doesn't mean that the equipment/raw material supplies aren't still available, just that they aren't worth as much as they were.

    In this case, the writedown is because the company had a large overhead on hand of the raw materials they use to make their wafers, and the value of that material dropped. As a result, they still have an "asset" in the form of raw material, it just isn't worth nearly as much as it was earlier.

    Think of it as if the company owned stock in a different company, and that stock dropped in value. They still have the stock, and it is still valuable, it just doesn't have the same value it used to have.

  • Report this Comment On September 26, 2012, at 7:02 AM, naseba1 wrote:

    The Solar Latin America Summit is bringing together key decision makers and government officials with regional and international leaders in solar energy who will shape the future of alternative energy production and consumption in Latin America.

    http://latinamerica.solarenergyseries.com/

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