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LDK Solar Vulnerable to Profit Taking on Margin Concerns

LDK Solar Co. (LDK) failed to break above its April 7 high of $39.25, topping out intra-day at $38.56 before falling to close up 1.75% to $36.57. It’s surprising that LDK has managed to hold its ground and even flirt with a three month high after issuing margin guidance on Monday that was much lower than anticipated. It seems that the stock has remained artificially high because of the continued flow of money into the solar sector while continuing to rise in sympathy with other “green” names that have been quite euphoric as of late – take for instance Canadian Solar’s 25% move yesterday on blow-out numbers and Evergreen Solar’s 9.83% pop on an analyst upgrade today. But that could change quickly if there is some rotation out of the sector once the severely propped up price of oil decides to retrace from current levels. LDK is vulnerable because although first quarter revenue and earnings were better than consensus estimates, the full year picture is quite mixed. Revenue guidance in the range of $1.08 billion to $1.18 billion is much better than the $1 billion previously expected, but potential gross margin erosion over the next few quarters is troubling. During the first quarter, gross margin was 27.7%, down from 30.1% from the prior quarter and is expected decline further to a range of between 23% to 28% for the remainder of the year, well below management’s previous estimate of 26% to 31%. With the construction of a plant still underway and unlikely to be a positive factor in the near term, higher polysilicon costs will persist in exerting pressure on the outlook and leave LDK shares vulnerable to profit taking, especially after nearly doubling in value since March.

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