This solar earnings season marks the nadir for the industry. LDK Solar (NYSE: LDK), which had provided an unbelievable outlook for the third quarter, fell flat on its face by posting a huge fall in revenues and profits and missing Street estimates. However, shares of the company surged roughly 7% under the belief that the industry has finally hit bottom and the worst is over.
But is this the case? Let's take a look.
Dissecting the quarter
Revenues fell a massive 30% to $472 million from the year-ago period as declining prices and weakness in the important European market took their toll. This is nothing new, as most companies have been reeling under the effect of a steep decline in prices, which have dropped almost 60% this year.
LDK is finding it hard to sell its solar panels and wafers, which is reflected in a 110% jump in inventories from last year. The European debt crisis has left its imprint on the industry as the moola required for financing solar installations is hard to come by. Margins have been hurt further by the inventory pileup as LDK had to write down $47 million of inventory to reflect the rapid decline in prices. All these factors doomed the company to a quarterly loss of $114 million from a profit of $93 million in the year-ago quarter.
The gloom continues
LDK expected that the industry would begin looking up in the second half of the year. But going by the current scenario, it seems the turmoil in the industry will continue in the short term. The wave of earnings that have come out this month have seen the likes of First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWR) either cutting down on their forecasts or reporting heavy losses. Suntech Power (NYSE: STP), another Chinese player, sees the industry rebounding in a year's time.
But even in the midst of so much negativity, solar stocks went up because investors believe that their terrible performances have been priced in already.
The Foolish takeaway
The road ahead for LDK is going to be difficult as it reels under the epidemic of oversupply and soft demand in the industry. I believe solar power is the next important energy source, but for the time being, these stocks may continue trading at dirt cheap levels. The industry is in shakeout mode, but I expect LDK Solar, one of the largest producers of solar wafers, will ride out the storm. To stay up to date on how the company combats the current solar market chaos, add it to your Watchlist by clicking here.
