October 8, 2008 - LDK Solar (NYSE:LDK)

October 8, 2008 - LDK Solar (NYSE:LDK) reported this morning that it has raised Q3 revenue guidance to a range between $530 million to $540 million, up from a previous guidance range of $486 million to $496 million. It also said that its shipments had a total capacity of 230MW to 240MW, up from a previously forecasted 210MW to 220MW. And it has reached 1.2GW of production capacity by the end of the quarter. This was its year-end goal, so it is clearly ahead of schedule. None of this should be too surprising for investors paying attention to LDK's results over the past couple of years. It has made a practice of executing and beating Street expectations, and raising guidance. Nonetheless, its stock has been sold off lately on broader market weakness and due to the Street's reaction to Goldman Sach's downgrades of First Solar (Nasdaq:FSLR) and SunPower (Nasdaq:SPWRA) yesterday, and related comments about module oversupply. We think the stock has tremendously oversold at current levels, and this morning's raise in guidance validates that sentiment.

We now raising our forecast for LDK's FY2008 revenue to $1.8 billion, and our income forecast to $324 million. At yesterday's closing price of $19.32, the company is trading at less than 7x FY08 earnings, which, if we are right about our estimates, will be up 131% on a Y/Y basis. The stock is trading at 1.18x FY08 sales, which we forecast to be up 243%. These multiples do not reflect fair value, in our opinion, and are the byproduct of the broader market selloff, and yesterday's commentary from Goldman Sachs about oversupply in the module space.

The oversupply issue is old news, and it has been getting priced into solar stocks now since January. The fact that Goldman Sachs decided to slash ratings on a couple companies that we agree, were still holding pretty stiff premiums on a relative basis, really shouldn't have bled over to impact LDK and several other midstream companies that have already been sold off to levels which more than factored this all in. But it did. We see this as unique opportunity to buy LDK at a tremendous discount to what more reasonable multiples would put the stock at.

At a 14x PE against 2008 earnings guidance, the stock would be trading at $66. This is a 230% premium from current levels. The S&P average has historically support a P/E multiple of 14x, and this is with the inclusion of a broad number of businesses that don't show anywhere near the sequential and year-over-year growth rate that LDK continues to demonstrate. So we think this valuation and target is completely reasonable and defensible.

That being said, the markets can stay irrational longer that you can remain solvent. This is the maxim that has been pushing so many fund managers to deleverage and blow out their positions - even the good ones - to get back to a level of solvency and risk that they can stomach. This is the euphoric dynamic which has driven the markets down 12% since we got the bailout bill, and more selling is on tap this morning. So LDK's stock can get cheaper, as its fundamental strength is being completely overlooked by the Street. We don't propose to be able to call bottoms. But we think anywhere at current levels the upside for LDK over the next 12 to 18 months, when the markets do eventually recover, is undeniable.

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