MEMC Electronic Materials: Earnings Preview

| About: SunEdison, Inc. (SUNEQ)

MEMC Electronic Materials Inc. (WFR) is scheduled to announce its fourth quarter fiscal 2011 results on February 15, 2012, after the market closes. Following MEMC’s negative pre-announcement during mid-Jan, we notice major downward movements in analyst estimates.

Third Quarter Overview

MEMC delivered decent third quarter results, beating the Zacks Consensus Estimate on the bottom line. The quarter’s adjusted earnings came in at 34 cents per share, which were much above our expectation. The adjusted figure excludes the impact of restructuring charges, goodwill impairment charges and other non-operating items, but includes direct sales and lease-back from the Solar Energy segment. On a GAAP basis, MEMC posted loss per share of 41 cents.

MEMC reported non-GAAP revenue of $859.0 million, which shot up 56.0% from the year-ago quarter. However, GAAP revenue increased only 2.6% year over year, while posting a sequential decline. Among the segments, Solar Materials witnessed a weak growth, while Semiconductor Materials and Solar Energy recorded a modest growth.

Margins have declined on a year-over-year basis on lower pricing for its semiconductor and solar chips.

Fourth Quarter Guidance

Weak demand along with painfully low silicon prices in the semiconductor and solar industry are leading to the changes. Following weak demand trends, MEMC lowered its revenue and earnings/loss per share guidance provided during the major restructuring held in December 2011. The company now expects fourth quarter 2011 non-GAAP revenue in the range of $753.0–$792.0 million (previously $789.0–$861.0 million) and GAAP revenue of between $698.0 million and $733.0 million (previously $523.0–$585.0 million). Non-GAAP loss per share is expected between 23 cents and 17 cents and GAAP loss per share is expected between $6.50 and $5.78. Previously, MEMC expected non-GAAP EPS in the range of (5)-10 cents and GAAP loss per share in the range of $6.38–$5.20.

Agreement of Analysts

All of the 7 analysts providing estimates for the fourth quarter revised their estimates downward in the last 30 days. Out of the 10 analysts providing estimates for fiscal 2011, 7 made downward revisions in the last 30 days. Also, a similar movement was noticed for fiscal 2012. No positive revision was witnessed, indicating a challenging quarter ahead.

The analysts are concerned about declining solar wafer pricing due to an oversupply across the supply chain. The analysts believe that it will not be possible for MEMC to offset the price declines with the ongoing cost reduction program.

Magnitude of Estimate Revisions

The movement of the Zacks Consensus Estimates for the fourth quarter and fiscal 2011 point toward the negative sentiments of the analysts. For the past 30 days, Zacks Consensus Estimates for the quarter and full year decreased 14 cents and 9 cents, respectively, to negative 14 cents and 33 cents. The Zacks Consensus Estimate for fiscal 2012 also dropped 9 cents during the similar time frame.


We believe that MEMC’s fourth quarter results would face pressure from solar price declines. However, stable pricing in the semiconductor vertical could provide some support. A continuous cost reduction measure is also encouraging.

To fight the ongoing pricing and demand crisis, MEMC announced a major restructuring in December 2011. As per the restructuring plan, the company would cut 20.0% of its global workforce, restrict production capacity in three facilities and combine Solar Materials and SunEdison businesses. By realigning its asset base and reducing its workforce, MEMC could achieve $200 million in annualized cash flow benefits by fiscal 2012, while dealing with the lower demand for its solar chips. We believe that this restructuring could prove a positive for MEMC going forward as the lackluster performance in the Solar Material segment will be offset by the steady performance of Solar Energy.

We see MEMC’s solar energy initiatives as a key driver for the long term. The company recently tied up with key players such as Flextronics International Ltd. (NASDAQ:FLEX) and Jusung Engineering Co. Ltd. to make its solar ventures efficient and profitable.

But the recent cessation of a solar wafer supply agreement with Suntech Power Holding Co. Ltd. (NYSE:STP), only because of a persistent fall in polysilicon prices, was alarming. Though we are unaware of any exact financial impact, we believe MEMC’s revenues and margins will be affected.

Moreover, there are risks of cuts in feed-in tariffs, which could affect solar deployments.

Currently, MEMC has a Zacks #3 Rank, implying a short-term Hold recommendation.

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