Friday, April 27, 2007

MEMC Electronic Materials (NYSE:WFR) - A bounce play over the next few days

Plenty of comments on MEMC Electronic Materials (NYSE:WFR) after in-line results and guidance disappointed the mkt.

- Citigroup says the story is not over yet, but margin for error is closing fast - Given WFR's leverage to the poly spot market, it's probably not over here until poly spot prices begin to moderate - unlikely near-term. That said, near-term risk heightened as guidance may not be as conservative as it looks b/c they think obligations to STP may prevent WFR from relying as heavily on a strong spot market in CQ2. Firm maintains Hold rating, tgt goes from $48 to $60 on shift to sum-of parts.

- Friedman, Billings, Ramsey notes that although reporting in line with guidance (1Q) and guiding to consensus (2Q) is not really a "miss," they still find the report/guidance disappointing since the company had "upsided" the guidance/consensus in the past four quarters.

Firm also wonders what it would take for the company to disclose more, when most other competitors do. To that extent, they note that, if MEMC's semi wafer customers are not ordering because they have sufficient inventory (for now), why is MEMC not able to sell the incremental poly (that otherwise would have been used to make the semi wafer) into the spot market?

- JP Morgan says MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between polysilicon demand and wafer demand to exist throughout C07 leading to additional tightness in the polysilicon mkt and eventually to upside to pricing.

Notablecalls: Despite the initial disappointment in numbers the bull case seems to prevail here. Looks like the lack of upside is rather caused by internal capacity constrains intead of lacking demand. One could even make a theory of too high demand limiting n-t revenue & EPS upside as MEMC is too busy supplying wafer and long-term contract instead of creaming off the polysilicon spot market.

With the capacity constraints easing going into the 2H and solar contracts ramping, the issues seem to be temporary of nature. Less supply and resulting tighter poly spot market should further drive already improving margins. Alltogether, the company is still in great shape.

Given the temporary nature of the "problems", I believe the current pre-market prices around $60-61 prove to be good buy for a bounce over the next few days.

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