The Worst Stock in Energy

I'm going to put this very bluntly: How is LDK Solar (NYSE: LDK  ) still in business? The company is drowning in debt, is losing money on everything it sells, and is seeing sales volume fall when competitors are starting to see improvement. Without the backing of the Chinese government there is no way this company would still be standing.

Yesterday LDK reported first-quarter earnings and there wasn't a lot to cheer about. Sales fell more than 50% from the fourth quarter to $200 million, gross loss was $131 million, and net loss was $177.2 million. Even after adjusting for $96.8 million in writedowns related to inventory and U.S. tariffs the company still had a -19.5% gross margin.

All of this is bad enough, but when you stack it on top of $3.4 billion in debt and only $136 million in cash there's real trouble ahead.

These results make solar bottom feeders Jinko Solar, Renesola (NYSE: SOL  ) , and Hanwha SolarOne (Nasdaq: HSOL  ) look like models of operational efficiency. These three had gross margins of 0.7%, -3.8%, and -9.4% respectively, even when including writedowns.

The future doesn't look bright
Management said the high production cost of polysilicon required a writedown, a red flag in my book. If your polysilicon production isn't cost-effective today, it won't be tomorrow, either. The cost structure for poly isn't going to decline precipitously overnight, it's going to have to be attained through improved equipment. In a conversation with GT Advanced Technologies' (Nasdaq: GTAT  ) CEO, he said companies that can't upgrade equipment as technology improves and lower their cost structure as a result will be left in the dust. LDK Solar is one of those companies.

Considering the debt load and terrible financial performance of LDK Solar, I have to wonder why lenders keep handing this company money. Management said in the conference call that lenders were "committed to working with LDK to assure long-term support," so there's clearly someone who has faith in a turnaround. I'm not one of those people and would stay far away from this stock, instead going for much safer investments, like one our analysts call one of the best stocks in energy. Find out what it is in our free report found here.

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. The Motley Fool has a disclosure policy.

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Read/Post Comments (6) | Recommend This Article (5)

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  • Report this Comment On June 27, 2012, at 3:47 PM, mikecart1 wrote:

    Solar is like natural gas. People want to brag about how great they are for the environment for making energy but the companies can't beat the system. The system right now likes oil. Oil will be king. Solar can be great and power lots of things including cars. However, who is going to pursuade all the car companies, all the gas stations, all the oil suppliers, all the governments, and all the consumers to go out and buy solar powered cars?

  • Report this Comment On June 28, 2012, at 3:42 PM, dsong wrote:

    You are 75% correct. Something you do not know are belong to China specifity.

    LDK is too large to fail. Its scale, product capicity, its big payroll (25000 worker force), huge manufactories (as big as a city) are #1 in China maybe in the world. The ceo Peng is not good for finance.

    That is lot of persons opinion including me. I do not think he has any quality as Jobs.(Peng said in public he wants to be Jobs in China). However, since China's stragety is solar energy indepent of fossil oil. LDK will not be down. Peng maybe lucky, since China solar demonds will doube 2012, triple to 10 folds by 2015 beyond. LDK will go to profit soon and its stock now is extremely below the book value will 10-100 fold as today's price, if Peng is not acting as an idiot.

  • Report this Comment On June 28, 2012, at 8:16 PM, Russo420 wrote:

    I agree with dsong. LDK will survive, I think the recent tariffs on the chinese will only add fuel to the fire. The Chinese government has set ambitious goals for the chinese solars. LDK will have revenue north of 10B by 2015

  • Report this Comment On June 29, 2012, at 9:50 PM, sailrick wrote:

    China will spend $450 billion supporting renwables, over the next five years, and $750 billion by 2020.

    A goal of 50 GW solar by 2020 was announced not long ago.

    Their plans for wind energy are even more ambitious.

    150 GW by 2020 and 1000 GW by 2050

    Of course wind is cheaper than solar right now. But solar costs will fall enough in the next several years, that I wouldn't bet against a much larger goal for solar, in their next 5 year plan.

  • Report this Comment On June 29, 2012, at 9:56 PM, sailrick wrote:

    mikecart1

    Solar doesn't really compete with oil, since oil is mostly used for transportation.

    Fossil fuels will not get any cheaper.

    Solar and wind will, and in the case of solar, much cheaper.

    I'm not sure what a solar car is. Did you mean electric cars, runnning off solar made electricity?

    If the battery design of one California battery company pans out in commercial development, plug in hybrids and electric cars will become a lot cheaper to own.

    DOE-funded battery breakthrough to halve cost, triple range

    "A new breakthrough from California-based Envia Systems will yield lithium-ion batteries that are less than half the cost of current cells, while also having three times the energy density. And guess who funded it? The Department of Energy. That’s right: Sometimes, when the government invests in innovation, it pays off moon launch-big."

    "Envia’s announcement said that its packs would deliver cell energy of 400 watt-hours per kilogram at a cost of $150 per kilowatt-hour. Though it doesn’t disclose a cost breakdown, Tesla Motors rates the energy density of its Roadster’s pack at 121 watt-hours per kilogram. Envia said its energy-density performance was verified in testing of prototype cells at the Naval Service Warfare Center’s Crane evaluation division."

    {read it at Grist}

    This will mean electric cars that are inexpensive, and have a 300 mile range

  • Report this Comment On February 11, 2013, at 1:47 PM, longline wrote:

    China Dev Bank Knows that LDK will be a winner

    Money being spent on new technology to lower

    cost of poly,so as the price of poly returns they

    will have a double edged sword,In the meantime

    they of course will be favored with China huge

    increased subsidies,it can be likened to playing

    roulette and having the house money on your side

    you will eventually win.

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