Tuesday, January 19, 2010

MEMC Electronic Materials Inc. (NYSE: WFR): Q4 Earnings Preview 2009

MEMC Electronic Materials Inc. (NYSE: WFR) is scheduled to release its financial results for fourth quarter of fiscal year 2009 on Wednesday, February 3, 2010. Analysts, on average, expect the company to report break even per share on revenue of $335.46 million. In the year ago quarter, the company reported earnings of 65 cents per share on revenue of $425.70 million.

MEMC Electronic Materials Inc. designs, manufactures, and sells silicon wafers for the semiconductor industry worldwide. Its products include prime polished wafers, such as OPTIA and annealed products; epitaxial wafers consisting of thin silicon layer grown on the polished surface of the wafer.

The company has been hit hard by the turmoil in the credit market as financial players abandoned U.S. solar energy projects last year. The 2008 collapse of top solar financier Lehman Brothers and the freeze-up in the global credit markets drove nearly all banks to halt funding for major new solar projects, forcing the makers of systems that turn sunlight into electricity to slash prices for their products and sending their stocks crashing. Globally, solar industry depends upon government subsidies and incentives. However, recent developments suggest that subsidies will inevitably be reduced or phased out. Generous federal subsidies in key European markets like Germany and Spain ensured high electricity rates for solar energy system. According to media reports, the German government is planning to cut solar subsidies for new roof and open-field sites from April by 16 percent to 17 percent. Additional cuts to the subsidies will be made from 2011 if solar projects amount to more than 3,000 megawatts, and even more if they total more than 3,500 megawatts. Already France in January trimmed the tariffs for electricity produced from rooftop solar panels by 24 percent. Spain too has taken similar steps.

In November, the silicon wafer manufacturer reported a loss for the third quarter compared with a profit last year as sales plunged 43%. The St. Peters, Missouri-based firm posted third quarter net loss of $64.6 million, or $0.29 per share, compared with net income of $182.8 million, or $0.80 per share, in the prior year period. Revenue plummeted $310 million from $546 million in the year-ago period. Analysts, on average, expected the company to report a loss of $0.06 per share on revenue of $301.59 million.

Gross profit in the quarter was $20.5 million, or 6.6% of net sales compared to $269.7 million, or 49.4% of net sales, in the 2008 third quarter. The decrease in gross profit reflected price reductions in wafers for solar applications.

For the fourth quarter, the company expects revenue in the range of $310 to $350 million with gross margin of approximately 10% to 14%.

For MEMC, fourth quarter was a busy one on acquisition front. In October, the company announced that it has agreed to buy privately held solar energy company SunEdison for $200 million. In December, the solar energy services provider announced Monday that it agreed to take an ownership interest in Eversol Corp., a solar wafer manufacturer in Taiwan. MEMC said it has purchased Gintech's 8.36% interest in Eversol at original cost, through a contract amendment. Further, MEMC bought additional 5.1 million shares of Eversol through an investment of $5 million that brought the stake to approximately 10.6%. MEMC also made venture investment in California-based Tioga Energy, a supplier of renewable energy services to commercial, government, and non-profit institutions. The recent buyouts by MEMC are being seen by many as part of its larger vertical integration strategy.

Late in December, the silicon wafer and solar energy company arranged to replace existing credit with a $250 million senior secured revolving facility, with an option to increase its size to $400 million. The three-year agreement replaces its pre-existing $200 million revolving credit agreement that was set to expire in June 2010, MEMC said on Tuesday in a filing with the U.S. Securities and Exchange Commission. The latest move is expected to provide adequate liqudity to MEMC.

Recently, MEMC subsidiary SunEdison announced that it reached a deal with power utility Xcel Energy to produce five solar power installations in New Mexico. SunEdison, will build, finance and maintain the facilities under a 20-year agreement with Xcel Energy, the company said. Financial terms of the deal were not disclosed.

The solar industry is now beginning to turn around as margins stabilize and customers return. In the recently concluded Copenhagen Summit, the five major polluters of the world agreed to take action to reduce CO2 aggressively, with $100B per year pledged to help developing nations adopt green energy technology to cut greenhouse gas. Meanwhile, the US, China, Brazil and India continue to invest heavily in wind and solar energy with China's $454B in the next 5 year period as the most aggressive one. Solar companies also benefited from tax credits for manufacturers as well as users of solar panels and solar energy systems. As part of the stimulus bill signed earlier this year, the federal government approved around $60 billion in loan guarantee authority and $30 billion in energy grants for renewable energy and transmission companies. Congress has also granted a 30% renewable-investment tax credit to help expand the development of alternative sources of energy. Needless to say, MEMC is likely to benefit from the improving trend over the past few months and the quarterly report may reflect sequential gains on few fronts.

The company's stock currently trades at a forward P/E (fye 31-Dec-10) of 17.69. In terms of stock performance, MEMC shares have gained 6 percent over the past year.

Full Disclosure: None.

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