About 10 days ago, LDK Solar Co. Ltd. (NYSE: LDK) lowered its guidance for the second quarter, and this morning the bad news became official. If anything, it’s even worse than expected.
Revenue for the quarter came in at the high end of the company’s last revision, at $499.4 million, down from $766.3 million in the same period a year ago and down from $565.3 million sequentially. The inventory write-down totaled $52.9 million, somewhat better than the predicted high of $60 million. The loss per diluted ADS came in a -$0.62, compared to a profit of $0.95 per ADS in the first quarter and a profit of $0.36 in the year-ago second quarter. Thomson Reuters expected a per ADS loss of -$0.33.
Gross margins for the quarter were 2.2%, compared with 31.5% in the first quarter and 18% in the second quarter of 2010. Operating margin was negative, -9.6%, comparative with an operating margin of 25.6% in the first quarter and 13.9% a year ago.
Not to worry, though. LDK believes the third quarter will improve and that the full fiscal year will come in at the numbers it forecast earlier this month. The company is forecasting full year gross margins of 15%-20% because it believes that prices are beginning to stabilize and its “order pattern” is improving.
If LDK is getting more orders, and if prices are stabilizing, how can gross margin go up? If prices are in fact stablizing, they’re doing so a a far lower rate than before. And it’s arguable that prices are stabilizing at all. For example, Harbor Freight Tools, is selling a 45-watt panel assembly for just $149.99, down from $249. A 240-watt solar panel from Trina Solar Ltd. (NYSE: TSL) is available for $1.81/watt at retail. Assuming a standard retail markup, that means that the average selling price for Trina is less than $1/watt. There’s no way LDK is making more than that. And there’s very little chance that the price direction is up, no matter what LDK thinks.
Analysts have pounded LDK this morning as well. Kaufman Brothers have maintained a ‘hold’ rating on the shares, but lowered their price target from $6/share to $5/share. Wells Fargo has downgraded shares from ‘Market Perform’ to ‘Underperform’. Zacks Investment Research has also lowered its rating from ‘neutral’ to ‘underperform’.
One way to stop the slide in margins is for the industry to consolidate. Another is bankruptcy — Evergreen Solar is gone and Germany’s Q-Cells may be next. Whether consolidation will help depends on how the many Chinese solar makers sort themselves out. If LDK and Trina and the others begin to merge, that could reshape the industry. If not, the weaker companies will slowly bleed to death.
LDK’s ADRs are down only about -2% so far this morning, at $6.04, in a 52-week range of $4.65-$15.10. With well over 30 million shares listed in the short interest, maybe bad news is not so bad.
Trina shares closed yesterday at $16.23, in a 52-week range of $12.51-$31.89, and haven’t moved in the pre-market. The Guggenheim Solar ETF (NYSE: TAN) closed yesterday at $5.52, in a 52-week range of $4.82-$9.34, and hasn’t moved this morning.
Paul Ausick
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