Tickers in this Article: LDK, FSLR, TSL, YGE, SOL, STP, GE, SI
It seems hard to argue that solar is not going to be an increasingly significant part of the world's energy production infrastructure. An IEA analyst's recent prediction that solar will produce the majority of the world's power by 2060 may be a little too far-reaching, but directionally that prediction could still be right. The question is, though, with so many players in the solar space, can LDK Solar (NYSE:LDK) emerge not just as a survivor, but as a leader in the world's transition to green energy?

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A Tough Second Quarter
LDK Solar's second quarter results highlight that, for however bright the prospects of solar energy may be, the here and now is still beset by volatility. Sales fell about 12% when compared to last year, but almost 35% when compared to the prior quarter, as the company has seen a very adverse pricing environment in the wake of major cutbacks in European demand and a glut in rival supplies.

Profitability was also hurt by a large inventory write-down ($53 million) tied to that drop in solar wafer prices. With the write-down, gross margin fell to just 2.2% - well below the year-ago level of 18% and the prior quarter result of 31.5%. Operating expense growth of roughly 30% seems a little inflated given the circumstances of the present, but LDK was going to post an operating loss even if the company had kept operating expenses flat. (For related reading on gross margins, see A Look At Corporate Profit Margins.)

Better Days Ahead?
While the second quarter was tough, management believes prices are stabilizing. To that end, guidance suggests a better than 30% sequential rebound in sales, even though wafer production may drop about 13%. On the surface, that seems like an ambitious projection, though in-line with the average published by Investext. After all, it is not as though a general sense of calm has returned to Western Europe and given the key roles of Germany and Italy in the bailout (one as the bailer, the other as the bail-ee) and the fact that they are two of the largest solar markets, it is hard to see a steady and stable operating environment in the offing.

Is This the Horse to Ride?
Perhaps a bigger question for investors is whether LDK Solar is the best option for playing the future of solar energy (whatever that may be). After all, management has not exactly distinguished itself with its forward-looking decisions; the timing of entering the silicon business, for instance, left a lot to be desired and unnecessarily bled away capital.

What's more, LDK Solar has profited from its role as a leading Chinese renewable energy company. It is unlikely (or at least uncertain) if an American company with LDK's record could constantly roll over the levels of short-term debt that LDK has, so it seems fair to say that at least some of LDK's success is based upon subtle state-sponsored favoritism. Should the Chinese government decide to be less involved (or to pick a new favorite) or should the banking sector come under stress, LDK's capital structure could become problematic.

Other Ideas
LDK isn't a bad company and there is a chance that it could eventually catch up with Trina (NYSE:TSL), Yingli (NYSE:YGE), and ReneSola (NYSE:SOL) and become a cost-leader in crystalline cells. Likewise, the spin-off of the silicon business could be a positive for the shares.

But will LDK ever be able to match the apparent quality of Trina's management team? Ultimately, in almost every industry, management matters. Will LDK be able to compete effectively with the likes of First Solar (Nasdaq:FSLR), particularly in valuable markets like Germany?

The Bottom Line
LDK is an undervalued company in an undervalued industry with both a bright future and a troublesome present. Unfortunately, investors are probably better served either with more diversified plays on global energy infrastructure growth like General Electric (NYSE:GE) or Siemens (NYSE:SI), or better-run solar plays like First Solar and Trina. As far as risky speculations go, LDK is fine, but investors willing to take on risk (including perhaps the risk of iffy management) may also want to look at Suntech Power (NYSE:STP) - a stock that seems grossly undervalued if it can make it through the next few years and stay in place as a leader among Chinese solar firms.

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