LDK: LDK Solar: Astounding Growth and Incredible Value

More analysis at www.RMIFund.com The recent decline in LDK Solar shares presents a great buying opportunity. The recent upward revision in guidance was enough to get me back in LDK this morning. This is one of the strongest names in the solar industry and is currently trading at a 4.74 Forward P/E. In my recent post Closing Position in LDK Solar (LDK), I said "the "big guys" will take this name down like they have over the past year and a half", and sure enough they did. The market sell off also helped. That was at $40 and we got a 50% discount today at $19.94. I think LDK has lagged other solar stocks as of late due to concerns over the companies' eager growth strategy. When analyzing growth in the solar industry, one should consider the cost of silicon and solar wafers, which are the raw materials that go into solar cells and photovoltaic solar panels. The price of multicrystalline solar wafers is on the rise, and I don't think analysts are fully weighing in LDK's upcoming plants coming online. LDK will soon be the largest producer of multicrystalline solar wafers. The current cost of solar cells is the only significant issue facing the solar industry at this time, but will soon change. With the increase of silicon supplies, comes the decrease in cost for solar cells. Once solar power reaches grid parity (the point at which photovoltaic electricity is equal to or cheaper than grid power or conventional power) it will only be a matter of time before solar power becomes a bigger player as a major energy source. The largest cost of solar cells is currently silicon, yet silicon is the second most abundant element in the world. An issue facing the production of solar cells is the lack of facilities for extraction and purification of silicon. LDK is currently building two polysilicon plants in JiangXi, China which are both on schedule for completion. In a recent update, LDK CEO stated "Our plant construction and equipment installation remains on schedule. The next major milestone is the plant process-commissioning phase, which is expected to proceed over the next three months. We are on track and confident in our ability to produce 100 to 350 MT of polysilicon in 2008. We will achieve an aggregate installed annual production capacity of approximately 7,000 metric tons of polysilicon by the end of 2008 and approximately 16,000 metric tons by the end of 2009." I expect Wall Street to increase EPS estimates in the coming months to account for LDK's new plants coming online. For some time now, the industry has suffered a shortage in silicon. This has driven up prices and led to PV panel manufacturers implementing long-term contracts to assure adequate supply in the future. LDK pays much less than other solar companies for labor, and will continue to be able to exploit cheap labor. Another plus for LDK is that the government is subsidizing their energy costs and provides them with a reduced tax rate. They exempt from the national enterprise income tax for 2006 and 2007 and scored a reduced national enterprise income tax rate of just 15% from 2008-2010. This is huge and gives LDK an advantage over competing solar companies. LDK has announced that it is nearly sold out of its wafer capacity for both 2008 and 2009. This is a great indicator and shows strength for this companies bright future. The fundamentals of LDK solar are amazing. LDK's net sales and profit have increased year over year since it IPOed last year. LDK seems inexpensive with a PEG ratio of 0.8236, which is below the semiconductors industry median PEG of 1.09. LDK trades at a P/E of 22.2, which is above the semiconductors industry median of 15.58. LDK reported 1st quarter 2008 earnings of $0.45 per share, and beat the $0.39 estimate. Currently analyst's estimates range from $0.38 to $0.49, with a median estimate of $0.42. LDK will announce 2nd quarter earnings the week of July 28, and I believe they will beat estimates of just $0.42 a share. I believe LDK is undervalued and will soon trade at a higher price. This company has a backlog of over $9 billion through long-term contracts. There are nearly 15 million shares of LDK short. Any substantial jump will send the shorts running for the exit. LDK Solar has a very bright future. Now a little bit on the solar industry as a whole: I believe solar along with wind power will be the growth stories in the coming years with our nation's energy crisis, which is crippling our economy. Solar power is by far the most efficient energy source, and will soon be the cheapest and cleanest. There are few disadvantages to solar because you basically get something for nothing, and every hour, the sun produces enough energy to power the entire world's energy needs for a whole year. Natural gas and coal are limited resources while the sun is not (well I hope the sun will be around for a while), and for nuclear power all I have to say is "Do you want one in your backyard?" Solar power is also environmentally friendly and does not put off carbon dioxide like its rival coal. Coal currently generates around 50% of our electricity, and is the single biggest air polluter in the United States. There are more than 600 coal power plants in the United States, which burn 1.4 million tons of coal each year, and pollute the environment when the coal is transported, stored, and burned. Another exciting fact about solar is that the excess energy generated can be sold back to utility companies making them your customer for the very first time. The current payback period for solar power on homes is under 5 years depending on power consumption and cost of panels, but will soon be significantly less. Some estimates believe you could payoff your solar investment in less than 2 years. Solar power produces the most power at the height of demand each and every day, and can even create power when it is cloudy. In addition to cost efficiency, solar power also adds value to one's home. Rising energy costs and mandates for clean energies are all positives for solar power. Many governments around the globe are enacting new laws in support of alternative energy such as solar. In conclusion, the outlook for solar is very bright!