MEMC Electronic Materials Inc. (WFR) is scheduled to announce its second quarter fiscal 2011 results on August 3, 2011, and we notice some downward movements in analyst estimates.
First Quarter Overview
MEMC delivered decent first quarter results, beating the Zacks Consensus Estimate on the top line, but missing on the bottom line. The quarter’s adjusted earnings came in at 9 cents per share, which fell 3 cents short of our expectations. The quarter’s miss could be attributed to the temporary shutdown of the Utsunomiya facility following the earthquake in Japan.
MEMC reported non-GAAP revenue of $832.6 million, which shot up 84.7% from the year-ago quarter, aided by the outperformance in Solar Materials and Solar Energy segments.
Margins were supported by production efficiencies and a favorable pricing environment. But manufacturing disruptions due to the earthquake in Japan put some pressure on margins.
Full Year Guidance
For fiscal 2011, MEMC continues to expect revenue in the range of $3.4–$3.7 billion on a non-GAAP basis and $2.8–$3.1 billion on a GAAP basis. The projected non-GAAP and GAAP earnings are in the bands of $1.00 to $1.30 and 25 cents to 55 cents, respectively.
Management further commented that despite unfavorable events such as legal verdicts and the Japan earthquake, it will remain focused on strategic business objectives, invest in growth and drive productivity in the core businesses.
Agreement of Analysts
Out of the 18 analysts providing estimates for the second quarter, 5 revised theirs downward in the last 7 days. Out of the 17 analysts providing estimates for fiscal 2011, 3 made downward revisions in the last 7 days. Also, a similar movement was noticed for fiscal 2012. No positive revision was witnessed, indicating problems in the 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 second quarter and fiscal 2011 point toward the negative sentiments of the analysts. For the past ninety days, Zacks Consensus Estimates for the quarter and full year decreased 9 cents and 6 cents, respectively, to 7 cents and 99 cents. The Zacks Consensus Estimate for fiscal 2012 also dropped 4 cents in the past ninety days.
Recommendation
We believe that MEMC’s second 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.
We see MEMC’s solar initiatives as a key driver in the long term. The company recently tied up with key players such as Flextronics International Ltd. (FLEX) and Jusung Engineering Co. Ltd. to make its solar ventures more cost efficient and profitable.
But the recent cessation of a solar wafer supply agreement with Suntech Power Holding Co. Ltd. (STP) is alarming. The deal came to an end only because of a persistent fall in polysilicon prices. The deal price was much higher. Though we are unaware of any exact financial impact, we believe that MEMC’s revenues and margins will get affected.
Moreover, there are risks of cuts in feed-in tariffs, which could affect solar deployments.
Currently, MEMC has a Zacks #5 Rank, implying a short-term Strong Sell recommendation.
