MEMC Electronic Materials Lowers Guidance, Again
In hindsight it is clear thematic investors got a little carried away with solar stocks and associated ancillary plays on the theme.
The beatdown in MEMC Electronic Materials (WFR-NYSE) pretty much says it all. The company’s balance sheet is full of cash and they carry little debt, but that is no solace to shareholders after the slide.
I cannot believe the stock is trading at 2x earnings, net of cash, but that is what Kaufmann Bros says today in a research note. Of course, there is a lot of that going around, and we will soon have as many net/nets as we have seen since 2002.
Of course, they cut guidance again yesterday, but does it really matter any longer? Now there are seen as being in the two worst end markets, semiconductor capex and solar.
The credit crisis is surely to blame and it appears solar valuations are coming in line with semiconductors, in a race to the bottom.
* Yesterday, November 17, management announced that it was going to miss the low end of the revenue range, would have gross profit margins of 48% and expenses of $41 million in 4Q08. This did not come as a surprise to us as in our last note, we stated that management would miss the low end of the range and we set gross profit margins at 48% and total expenses of $41 million in 4Q08. At the time our channel checks came back with significant weakness in the semiconductor channel for which MEMC makes raw materials.
There was risk to several of its solar customers ramping demand because of the weakness in the credit markets and these two things worsened in 4Q08. Additionally, some customers were asking for extended delivery and payment terms. This prompted us to project a down sequential quarter. Consensus had projected that management would meet its original guidance despite having missed the last five consecutive quarters.
* Yes, there is weakness in the semiconductor market and weakness in prices for silicon used in solar cells. Customers are asking for extended payment terms or delivery holidays. Our estimates reflected and continue to reflect this. We are assuming that weakness continues into 2009. Despite that, we think WFR is an attractive stock. There is more than $6 per share in cash, no debt, the company is profitable, there is a stock buyback program in place and the CEO is being replaced.
* We are leaving our estimates unchanged. Management’s new revenue guidance is $475 million to $525 million; our model projects $530 million but changing that would affect our EPS estimate by $0.01 at the high end. By comparison, the consensus revenue estimate for 4Q08 is $570 million and the EPS estimate is $0.95. In our view, EPS need to get below $0.75.
* We are taking our price target to $35 from $52 based on the shares trading at 10x our 2009 EPS estimate of $3.52. To the extent that the stocks trades down on weakness, we think it would be a good opportunity to take a position. At current prices, less cash per share, the stock is trading at roughly 2x next year’s EPS.
The last one to sell should turn out the lights....
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Good god....
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