MEMC see demand softness, analyst not concerned

While MEMC's stock slipped more than 8% in this morning’s trading, analysts have taken an understanding tone to MEMC's cautious approach to Q3, with some suggesting now is a good time to pick up a bargain.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 9/3/2008

Although MEMC Electronic Materials Inc cited softness in demand from semiconductor applications customers in its cautious Q3 update, members of the analyst community are viewing such issues as short term and are continuing to value the company’s stock.

St Peters, Mo-based MEMC said in its scheduled update for September quarter that polysilicon production rates at its Pasadena, Texas, facility have been at levels that, combined with noted strength of demand from solar applications customers, could allow the company to achieve results in the upper half of its targeted financial range. In the company’s July Q2 financial statement, Q3 revenue was targeted at between $560 million to $620 million with gross margin of approximately 54% to 55%. The high-end revenue target would represent growth of 17% sequentially and 30% year over year. The gross margin target would represent expansion of up to 180 basis points versus the previous quarter and up to 450 basis points versus the year-ago quarter.

However, since MEMC issued its guidance it faced an unexpected challenge: Tropical Storm Edouard, which in August disrupted operations at MEMC’s Pasadena polysilicon plant (pictured, right). Earlier this year, that same plant’s operations were disrupted when a transfer line from a transport vehicle developed a leak and caused a release of STF (silicon tetrafluoride), a raw material gas used in the manufacturing process.

“There continues to be the potential for unanticipated events to occur, which could affect our polysilicon production output, as we have experienced over the past year. These elements warrant a continued degree of caution in our outlook given the amount of time left in the quarter,” Nabeel Gareeb, MEMC's president and CEO, said in the company’s Q3 update statement Tuesday afternoon.

While MEMC’s stock, WFR, slipped more than 8% in this morning’s trading to $42.91 at 12:30 pm eastern, analysts have taken an understanding tone to MEMC's cautious approach to Q3, with some suggesting now is a good time to pick up a bargain.

“Near-term manufacturing hiccups have resulted in company-specific bad news as of late, which, along with potentially negative near-term news on solar legislative driven demand and a weak macro environment has resulted in share underperformance. However, we believe all three of these issues are short-term in nature and provide a good entry point for value oriented investors, as well as growth investors,” John Hardy, an analyst at American Technology Research, said in a research note this morning.

Hardy warned of MEMC’s challenges, namely the threat of new entrants creating an oversupplied market for polysilicon into the solar industry; the potential for the solar market to experience a meaningful push-out of demand in 2009 if incentive legislation issues in Spain and the US are not resolved favorably; slowing semiconductor demand due to inventory builds and weaker demand; and decreasing leverage to the lucrative spot market as long-term contracts ramp. Still, the analyst remained positive on the company and solar industry overall.

“MEMC’s proven ability to deliver high-purity polysilicon to the semiconductor and solar market, along with a depressed valuation due to transient issues, supports our view that the stock is among the most defensive and potentially profitable ways to benefit from solar unit growth. We view the company’s capacity ramp plan, leverage to the spot poly market, and strong market share of larger diameter wafers for the semiconductor industry as core competitive advantages over peers and new entrants,” Hardy (pictured, left) said.

“While it is possible for solar demand to soften, we believe other geographies will pick up the slack in the event legislation is less favorable for the solar industry in the US and/or Spain. We believe square inches of silicon consumed by the semiconductor industry will continue to increase as complexity of devices and unit growth in high volume markets such as memory benefit from demand elasticity. Lastly, we believe a more stable stream of cash flow generation from long-term contracts will ultimately reward shareholders with higher equity value,” Hardy concluded.

American Technology Research further noted that MEMC deposits due from Conergy and Tainergy for 2008 have been received and that the company has commenced wafer deliveries to the customers.