(LDK Solar story updated for Tuesday close)
NEW YORK (
) -- Few solar stocks have attracted as much recent optimism as
, with recent price targets from LDK bulls suggesting the stock will double in value.
On Tuesday morning, a notable bear take on the Chinese solar stock surfaced, as Collins Stewart recommended a sell on LDK. Notably, the sell recommendation from Collins Stewart came on the same morning as Brean Murray initiated coverage on LDK Solar at a buy.
In the last week of February, Kaufman Brothers initiated coverage of LDK Solar at a buy with a price target of $24. Needham & Co. recently moved up to a $23 price target on LDK Solar.
LDK Solar shares dipped below $12 on Tuesday at the close for the first time since January. LDK shares closed trading with a value of $11.94, or a loss of 1.9% on the day -- among the bigger losses in the solar sector on a bullish day for equities, though trading volume was typical for the Chinese solar company.
For every bull there is a bear in the same way that for every buyer there has to be a seller. Just look at
. In the case of LDK, the bulls and bears depart over many issues, including the impact of Italian solar subsidy revisions, pricing in the wafer market, the impact of LDK's plans to vertically integrate, the value of its planned polysilicon business IPO, and the competitive threat posed by GCL-Poly, which has set its sights on dominating the solar wafer market.
In writing about Italy, Needham recently recommended LDK Solar as a defensive play during a period of uncertainty. "We believe increased volatility on subsidy discussions is once again dominating the headlines. Therefore, we suggest investors be more defensive on the group in the near-term. Among names under coverage, we remain most positive on LDK (Buy) based on: 1) upside to Street's estimates; 2) better poly/wafer pricing; and 3) IPO of the poly subsidiary to unlock value," wrote analyst Edwin Mok.
In his downgrade of LDK on Tuesday morning, Collins Stewart analyst Dan Ries took a different view of the LDK business during a period of uncertainty for all solar stocks, coming from the perspective of a shakeout in solar and a vastly different operating environment for LDK core customers. The Collins Stewart take was in line with the broader thesis that second and third tier solar companies face the true existential threat in a slowing solar demand environment. The Collins Stewart analyst is also less enthused about LDK's vertical integration plans as he is worried about the company's core wafer business.
"LDK's customer base is skewed to foreign cell manufactures and 2nd- and 3rd-tier module vendors, and it is ... highly exposed to the spot market. It enjoyed a strong CY10 in the strong demand, module 'under-supply' environment, when module vendors chose to buy spot market wafers to maximize their module volume. The spot wafer market may dry up quickly in a less robust demand environment. We believe LDK is at risk for a large volume and price pullback in the disrupted 2Q11 and the oversupply conditions likely over the course of CY11. Reports suggest 2nd- and 3rd-tier module vendors are already showing production, which should in-turn hurt the spot wafer market in the days ahead," the Collins Stewart analyst wrote in downgrading LDK and bringing his price target down from $12 to $9.50.
There is also the issue of polysilicon giant GCL-Poly becoming a major player in the wafer market and challenging not just LDK but also
. The threat from GCL-Poly to the existing wafer establishment was evident in the reaction to ReneSola earnings, when investors were quick to pull the trigger on a sell on the signs of any 2011 outlook weakness. Analysts who were surprised by the level of the negative reaction to a solid fourth quarter earnings for ReneSola, though an weak guide for the first quarter, pointed to the GCL-Poly issue as a source of ongoing concern for investors.
Needham's Mok is more focused on the short-term pricing when it comes to LDK, and strong wafer demand and pricing trends in the near-term, "which bodes well for at least 1H11," the analyst wrote.
However, Collins Stewart is not willing to even give this cushion to LDK Solar, writing on Tuesday that even with the second half of 2011 being the biggest challenge with the expected changes to Italian solar incentives in Italy, "Given the 2-3 month lag time between a system's mechanical completion and it being registered (the date that determines the FIT), new system starts will likely slow dramatically in the weeks ahead."
LDK Solar bulls focus on the vertical integration story from the Chinese solar company, which has guided in 2011 to 800 megawatts to 900 megawatts in module sales. Several analysts have indicated to the Street that while the 800 megawatt to 900 megawatt figure for module sales would be a significant accomplishment, it also seems to be an aggressive target.
Needham has also noted that LDK's planned spin-off of its polysilicon business should unlock value in shares, while Kaufman Brothers, in launching coverage of LDK at a buy, is focused on the LDK cost curve.
Kaufman Brothers arrives at a 6 times multiple for LDK and a $24 price target, with earnings at $4.03, arguing that LDK trades at a "significant discount to the industry due to prior ramp delays in their polysilicon facilities. We believe those delays are now past and the company is beginning to ramp production rapidly." Kaufman is 85% above consensus on LDK 2011 earnings.
The Kaufman analyst is not concerned about broader solar industry overcapacity, either, at least not in the case of LDK and as it relates to the poly business specifically.
"One of the larger worries surrounding the solar industry is the potential for oversupply and the possibility of significant price declines. While we are significantly above consensus forecasts for the company, this includes expected price declines of ~15% in each segment, which is built into our model. We believe that LDK is in a better position than most solar industry players to absorb price declines due to the expected cost declines inherent in the model. LDK has been adding capacity aggressively and incurring the costs, but not generating significant output to offset all those costs. For example, in 2010, we estimate the company was only operating at 45% utilization in its polysilicon business and only 25% in its solar module business. We expect this trend to reverse in 2011, with production ramping faster than capacity, resulting in better utilization and significant reductions in its per unit costs.
One argument that helps the bulls is LDK's valuation. Like many Chinese solar stocks, LDK Solar is not an expensive stock, trading at 5 times 2011 consensus earnings.
Overall, 11 analysts rate LDK a buy, 8 rate the stock at neutral, and 5 analysts have LDK at a sell recommendation, according to Yahoo!Finance.
-- Written by Eric Rosenbaum from New York.
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