Here’s Why LDK Solar Has a Not-So-Sunny Future

Solar PanelsHigh U.S. import duties and weak prices have left their mark on China-based LDK Solar (NYSE:LDK), and shares slid close to 10 percent after the company reported its sixth quarterly loss on Monday morning.

What Went Wrong this Quarter?

LDK may be the second-largest producer of wafers for photovoltaic cells, but its sales are dropping and its problems are mounting. While the solar company did meet analysts’ expectations for the third quarter, its earnings report showed the degree to which its profit margins are being affected by current global conditions.

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“We were pleased to deliver third-quarter results that were in line with expectations,” said Xingxue Tong, President and CEO of LDK Solar, in a press release. “While we saw improvement to our top and bottom line in the third quarter, our results continue to reflect the industry-wide pricing pressure and demand weakness that is negatively impacting the entire solar supply chain.”

Over the past four years, solar panel prices have decreased by 75 percent, and manufacturers’ profit margins have fallen correspondingly. In the case of LDK Solar, low European demand and the company’s expanded production capacity resulted in a third-quarter gross margin of negative 11.2 percent and operational losses of $75.7 million. Although the latest results mark an improvement over the previous quarter, LDK still cut its full-year forecasts for sales and shipments and laid off 16 percent of its workforce. As Reuters reported, LDK has one of the most stretched balance sheets in the industry.

LDK’s results were also hurt by U.S.- and European-imposed anti-dumping tariffs, which in the United States can range from 18.32 percent to 249.96 percent on solar-energy cells imported from China. The tariffs were implemented to prevent Chinese solar companies, including LDK, from selling products below cost, a practice that makes it difficult for United States-based companies to remain competitive.

CHEAT SHEET Analysis: Are Low Prices a Solar Industry Trend?

One of the core components of our CHEAT SHEET Investing Framework explains that companies riding macro trends tend to outperform those that don’t. However, the reverse is also true. Trina Solar (NYSE:TSL), Suntech Power (NYSE:STP), and LDK have all seen their profits reduced because of lower prices, lower demand, and higher tariffs.

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