Updating My Outlook For MEMC Electronic Materials

| About: SunEdison, Inc. (SUNEQ)

Since my previous mention of MEMC Electronic Materials Inc. (WFR) on July 2, 2012, shares of the company have been on a wild ride. Initially, MEMC Electronic Materials sold off by more than 30% before rebounding to current levels.

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WFR Chart
data by YCharts

My Previous Outlook

I expect the short squeeze to continue for anywhere between a few hours to a few days. However, I would be a seller into the rally as the company still faces an uphill battle and shares are likely to go through a period of consolidation following the massive move higher over the past month. That being said, in my opinion, WFR is probably a better speculation than some of the weaker Chinese solar companies like JA Solar (NASDAQ:JASO), LDK Solar (NYSE:LDK), or Yingli Green Energy (NYSE:YGE).

In the time since that was written, MEMC Electronic Materials has gone through a significant period of consolidation and has significantly outperformed JASO, LDK, and YGE.

WFR ChartWFR data by YCharts

Earnings Highlights

On August 9, WFR reported second quarter earnings:

  • Revenue of $933.4 million vs expectations of $748.2 million.
  • Earnings of 14 cents per share vs expectations of 2 cents per share.

CEO Ahmad R. Chatilla's Comments From Conference Call:

Solar Energy - in our Solar Energy business, the markets remain very challenging. Housing price declines have moderated. And although lower material prices are good for the industry in the long term, they are difficult for many companies in the short term. We are happy to report the sale of all but 14 megawatts of the European projects we spoke with you about last quarter, as well as additions to our pipeline.

I'm encouraged and proud of the efforts and the accomplishments of our team in driving second quarter results in the Solar Energy business. However, the environment remains very difficult.

Our restructuring continues on track and would be largely complete in the third quarter. At the end of the second quarter, we have reduced cash operating expenses. Our solar wafer business is now cash breakeven, and we maintained our pipeline at 2.9 gigawatts while controlling development expenses.

In our semiconductor business, we believe the market bottomed in the first quarter and began a recovery in the second. Our read of customers and the market indicates improved but limited demand growth in the second half.

Our cost-reduction plan have progressed as expected and improved efficiencies and careful capital spending will lower our breakeven revenue.

Chatilla's comments seem to indicate that business has finally bottomed for WFR.

Short Interest

Interestingly, despite the recent positives for WFR, short interest has increased. As of July 31, when short interest was last updated for WFR, 28.63 million shares or 14% of the float was sold short. This represents a slight increase from the 12.3% short interest in July. The high short interest means that the potential for a short squeeze remains.

More Bullish

I am now more bullish on WFR than I was in early July for a few reasons. Firstly, one of the reasons I was cautious about the stock in early July was the parabolic move upwards after good news. Now, after a month-and-a-half of trading, WFR has gone through a significant consolidation period. During this time, much of the hype that was surrounding the stock in early July has worn off.

Another reason why I am more bullish on WFR now is the fact that the company reported a much better than expected earnings report, yet the stock has not risen from early July levels. Lastly, the increase in the short interest indicates that many on Wall Street are still skeptical about the company. If WFR reports more good news going forward, short sellers may be forced to cover, leading to a short squeeze.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.