Friday, January 26, 2007

Color On Quarter: MEMC Electronic Materials (NYSE:WFR)

MEMC Electronic Materials (NYSE:WFR) getting mainly positive comments after the co reported another beat & raise qtr. Price targets and estimates are getting bumped at most firms.

- JP Morgan notes MEMC continued to show its pricing leverage. Even in a relatively flat semi wafer start environment, it modestly beat its GM guidance for C4Q06, and guided GMs up 200bps to 50.8% for C1Q07. Importantly, MEMC provided C07 revenue and PF EPS guidance of greater than $1.9bn/$3.00, with C07 EPS guidance significantly above pre-call consensus.

Inventories for MEMC continued their downward trend to 34 days, setting a new historical low. Management commented that inventory levels were near the absolute bottom and would probably not decline any further. Firm believes the continued decline in MEMCs inventory underlines the continued tightness of polysilicon which is unlikely to be resolved until 2008 at the earliest, in their view.

MEMC indicated that the demand for solar related polysilicon remains strong and unsatisfied. Additionally, firm believes C1Q07 is the low point this year for QoQ semi wafer start growth, and throughout the remainder of the year, as wafer start growth reaccelerates, MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between the two markets to exist throughout 2007.

- CIBC raising price tgt to $59 from $50 on strong results and an extremely bullish 2007 and long-term outlook. Firm notes that margins continued to rise and are further guided to rise, debunking the bear case.

Firm says MEMC continues to prove the wrong the bears, who claim that solar demand is not as strong as expectations and that corporate margins have peaked. The tight polysilicon situations (which is caused by PV demand), has led to a continuation of high silicon pricing, providing the revenue growth during the quarter. Management indicated that semiconductor silicon consumption was down slightly in 4Q, but was offset by slight pricing increases. This is in line with management's prior commentary and firm's checks across the foundry and semiconductor supply chain. As a result of the subdued semiconductor performance, revenue growth for MEMC was likely driven by increased spot polysilicon sales to solar customers, as more capacity has come online in preparation for the Suntech and Gintech solar wafer supply contracts that begin in 2007.

- Citigroup outlining positives and negatives:

Positives: Estimates going up yet again; solar allowing WFR to barely blink during semi downturn; guidance suggests solar margins 70%+ and likely to stay there for a while; labor savings still coming.

Negatives: When the music stops on poly shortages WFR's weakening 300mm position will become problematic; long-term model sets an extremely high bar and suggests mgmt is frustrated w/stock price.

Price tgt goes to $48 from $39, but "We've missed this train and we're not chasing it" as the note's headline says.

Notablecalls: Needless to say that I agree with the Citigroup here. It's been fun while it has lasted, but would not chase the stock at the the $46.5 levels of afterhours. I think they make a great point of mgmt being frustrated w/ stock price and don't think it's a good sign. Mgmt is probably understanding that the mkt is not expecting the music to play forever and therefore are laying out long-term model. Not sure if the mkt buys into that - after all, it's based on the same tidbits that have driven the stock so far. The stock has been acting too heavy of late for all the positive chatter. Any cracks in the buying interest may provide nice shorting oppty today.


tunemann2003 said...

Oh boy...I should have got this like I had planned.

wincity said...

What does it mean that "mgmt is frustrated w/stock price"? Thanks.