For LDK Solar, big dreams of solar domination are facing a difficult reality, as well as the company's big debt load.
An example of why LDK should not be trusted by investors (and there are many): It provided its third-quarter guidance a full two months into the quarter, and based on Monday's numbers still came up 29% below its revenue guidance. In past years, LDK has missed its revenue guidance by as much as a billion dollars so this should not have surprised anyone.
As TheStreet wrote when the solar sector entered its current downturn at the beginning of this year, LDK Solar is arguably the most dangerous solar stock out there, heavily indebted and with Wall Street buy ratings banking on a successful initial public offering of its polysilicon operation this year (an event which still has not happened even though LDK continues to talk it up). In fact, polysilicon prices have entered free fall and the major players in the market announced massive capacity expansion plans. LDK also has been trying to move both into module production and project development, while facing intense pressure in the wafer market from GCL-Poly. Wearing all of these hats at once might make the company look like it's on the right track (to some), but in the current solar downturn it's more of a dream than a reality.
Making a bad situation even worse, the head of LDK Solar's audit committee left in the middle of the sector downturn (always a negative headline for a Chinese equity).
As Dan Ries of Collins Stewart wrote on Tuesday after the LDK pre-announcement, "While the market was poor ... the company has badly under-estimated the challenges associated with entering the module market and understated the inherent difficulty of competing head-to-head in the wafer market with the cost advantaged GCL Poly. ... Given concerns about LDK's financial viability ($3.3B of debt as of 6/30/11, only $1.15B of cash), we do not believe it has a 'winning hand' in the module market, as its poor balance sheet naturally leads to concerns on the part of solar system buyers (and the banks that finance systems) about the ability of LDK to honor a 20-year warranty. ... Given LDK's higher-than-peers' production cost, high interest expense load, and limited brand strength in modules, its loses are expected to continue in this downturn."
Reis moved to a $2 price target on LDK shares and a sell rating.
When the company with arguably the best balance sheet in solar, First Solar(FSLR_), is firing its CEO and rumored to be running into the hands of a GE because it can no longer "go it alone," the issue of a solar company's balance sheet is only magnified the worse the balance sheet looks, and LDK is the poster-child for the bad balance sheet in solar.
In fact, there are some analysts, like Paul Leming of Ticonderoga Securities, who have said since the industry downturn began that LDK should be shorted all the way down to zero. While even the biggest solar bears believe the Chinese government will keep LDK Solar afloat -- too many jobs in LDK factories, which have been described by some as "small cities," are at risk -- they don't assume any reorganization would end with any value left to current common equity holders.
There will be a point when solar shares are poised for bargain-hunting. In fact, the biggest solar bear out there, Gordon Johnson of Axiom Capital, wrote on Monday, "While prices have continued to fall on a week-over-week basis for polysilicon, solar wafers, solar cells, and solar modules, we look to the pricing data this week on Wednesday to gauge whether the recent surge in Italian installations will have any impact on pricing. Should prices stabilize ahead of hitting cash costs (prices for all substrates are still above cash costs), we believe a near-term buying opportunity would emerge in the solar space (that's right folks ... we are not perpetual bears). We will continue to monitor this dynamic very closely."
Throughout the solar downturn (for a quick recap of how bad things are in U.S. solar click here and here), I've received comments from retail investors saying that LDK is "so cheap" it's time to get in (I also received one death threat from a commenter who threatened to cut off my head for suggesting that LDK was a huge risk).
Let the Wells Fargo coverage drop be one more warning about this company. I've told retail investors when they ask, "How can one not invest in LDK at these prices?," that just about anything other than LDK would be a better idea for your money, including, but not limited to, Italian bonds, MF Global, Solyndra and Kardashian weddings.
-- Written by Eric Rosenbaum from New York.
SOURCE: http://www.thestreet.com/story/11311799/2/ldk-solar-gets-kiss-of-death-from-wells-fargo.html
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