We Continue to Think LDK (NYSE:LDK) and A-Power (Nasdaq:APWR) Are Way Oversold

Dec 01, 2008
Author: SCP Editor

December 1, 2008 – Stocks are pulling back this morning ahead of key economic data which will likely show that the economic conditions in the U.S. continue to deteriorate, while traders take some of their profits from last week’s record-setting session of the table. Amidst this weakness, we expect to see more opportunities to accumulate market leaders in the renewable energy and clean tech sector at cheaper prices. Here are a cople favorites from our watch-list:

Solar Sector (our top pick)

·         LDK Solar (NYSE:LDK). We are long-term bullish on LDK, which continues to post solid financial results and favorable guidance. As we write this, the stock is trading at $13.86, down $1.62, or 10.47%, about 5.3x its trailing 12-month earnings, about 1.2x trailing 12-month sales, and about 1.75x book value. These multiples all represent, in our opinion, a deep discount given the fact that the company continues to post triple-digit year-over-year revenue and income growth, and it is a leader in a growth industry which boasts long-term positive trends.

To be sure, there are legitimate concerns for solar stocks about commoditization due to oversupply of polysilicon and modules in the markets which lead to ASP erosion and margin pressure. On the other hand, we think these concerns have more than been priced into the sector, and LDK is particularly well-positioned to deal with them given the fact that it is becoming more vertically integrated through the build-out of its polysilicon manufacturing plant which will give it more pricing stability. This stock is really cheap, with loads of upside, we think.

It is trading 0.89x projected FY08 revenue of $1.8 billion, and 0.5x projected FY09 revenue of $2.9 billion. Did we mention that it is already completely sold through its 2009 production? It is trading at about 4.5x projected FY08 income of $319 million, and about 2.5x projected FY09 income of $580 million. At a modest 10x projected FY08 earnings, the stock would be trading at $30, a 116% increase from this morning’s trading level.

Wind Energy Sector (our top pick)

·         A-Power (Nasdaq:APWR). We are also long-term bullish on APWR, which, like LDK, continues to post solid financial results and favorable guidance. The stock is trading at about $3.76, down $0.54, or 12.56%, about 5.2x its trailing 12-month earnings, about 0.6x trailing 12-month sales, and about 0.98x book value.

As with LDK, we think these multiples are indicative of a stock that is way oversold for a company that is posting triple-digit year-over-year revenue and income growth and that is building a leadership position in a massive growth market (Asia) for wind energy and distributed energy. The primary concerns that we are seeing relating to A-Power’s stock, are that of disbelief. The markets seem to be totally discounting the stock based on the fact that they don’t think A-Power will be able to deliver, either in its wind turbine business or its distributed energy business. But the company’s performance just doesn’t justify this kind of pessimism.

A-Power has amassed a backlog across its business of more than $1 billion, it has a solid balance sheet with no debt and cash of about $60 million, or $1.80 per share. The company has reaffirmed the fact that it expects to earn about $35 million this year, and $70 million next year. The stock is trading at 3.48x this year’s earnings and 1.74x next year’s earnings. At a modest 10x 2008 projected earnings, the stock would be trading at $10.86, a 188% premium to today’s trading price.  

We think these two stocks represent two of the best values in the renewable energy and clean tech sector, with the most upside. Today’s broader market weakness is creating an opportunity, in our opinion, to accumulate LDK and APWR where only the negative and risk is being priced in, which we think is way overdone at this point. None of the growth (historical and forward-looking) in these stocks has been priced in, in our opinion. We don’t think these stocks will buck the larger trend, and we think it is reasonable to expect the broader markets to pull back further this week amidst dismal employment data, which could likely create even more attractive entrance and accumulation points, but we think that anywhere at current levels the reward to risk ratio is more than compelling.

Important Disclosure: SCPEditor is LONG LDK and APWR. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.