LDK's Above the Fray

By Toby Shute
November 20, 2008 | Comments (4)

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I've got to say, these solar wafer firms' reports are like night and day.

First ReneSola (NYSE: SOL) drops a bomb with its comment that its domestic (i.e., Chinese) customers are backing out of contracts. Then LDK Solar (NYSE: LDK) comes along and says that everything's A-OK.

Can both of these statements be true?

Yes, I think so. It really boils down to customer mix. LDK's largely fixed-rate, take-or-pay contracts are also key, but the firm's customers wouldn't lock into such serious long-term agreements if they didn't have the staying power to ride out this pukey market.

Take the latest deal. LDK and BP's (NYSE: BP) solar division just signed a three-year, 435-megawatt contract for multicrystalline wafers. Compared to the 10-year contract with Canadian Solar (Nasdaq: CSIQ), this isn't the biggest of the bunch by any means, but LDK has snagged 14 such arrangements this year alone, with other heavy hitters including Hyundai, Moser Baer, and Sumitomo. These latter companies may not trade on a U.S. exchange, but they are diversified and have real staying power.

Reader responses to my solar stock criticisms seem to suggest that I don't understand the potential growth of this industry. That's way off-base. To the winners will go tremendous spoils -- but to finish first, you must first finish.

Through careful contracting, LDK Solar looks to have secured a place for itself at the winners' table, whatever happens over the next quarter or the year. A lot of other solar pure plays simply will not make it. LDK told us that small players are closing their doors and liquidating inventories at any price -- hence the pressure on folks like JA Solar (Nasdaq: JASO). This is why I continue to urge Fools to exercise caution in this sector.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

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  • Report this Comment On November 20, 2008, at 4:26 PM, Bootluver wrote:

    Above the fray? Yeah right, down over 10% Will you jerks stop the BS !!! Get off the damn web. Just doing my job, trying to get Foolish A Holes off the net. Am I doing a good job folks?

    Boots, DE

  • Report this Comment On November 20, 2008, at 4:43 PM, DBGMVETTE wrote:

    I think you have given the best perspective on Solar and the most balanced, though short, explanations of what "will" happen in the industry when the "financial melt down" ends.

    It is and always has been the business cycle answer to "over leveraging" that every CEO and CFO should have learned by the time they became such. The Strong and well managed will survive, those with some value to the market will be bought up, and the overleveraged weak will be sold off in parts or otherwise disappear.

    I would only disagree in that LDK could loose more income from contracts than it might indicate at this point and some of the others may squeek by on reduced margins for now if they have the backing and good management to see them through this exceptional period.

    This doesn't mean you might not see temporary bounces in the market prices of many solar stocks but the basics of the underlying individual company is what will determine their future 1 to 2 years down the road when solar may start to realize it's potential good or bad. Some great buys out there if you pick the right ones and stay around long enough for them to become real.

  • Report this Comment On November 20, 2008, at 4:54 PM, DBGMVETTE wrote:

    P. S. My comments above assumes there will be a greater demand for solar products in the future, which i think ther will be, and also that existing companies can adapt to new technology as it comes along if pricing or end value is more favorable.

  • Report this Comment On November 20, 2008, at 8:48 PM, jenkins21 wrote:

    Renesola never reported any contract losses. They reported honest forward projections given the market conditions and their predictions were not at all negative. People read the reports yourself, do not depend on second hand information by incompetent and bias hack reporting. All stocks are down, don't make it worse by damaging heathy companies.

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