Solar Losers: MEMC Disappoints Again

MEMC Electronic Materials again disappoints the Street with its earnings, and suspends guidance.

Author:: Eric Rosenbaum
Publish date:: Nov 2, 2010 7:37 PM EDT

(MEMC, Solar Losers story updated for Tuesday trading, analyst outlook)

NEW YORK (

TheStreet

) -- The reaction to

MEMC Electronic Materials

(WFR)

earnings seemed swift and severe, with a 10% decline in shares of the already beaten down U.S. solar company on Monday in the after-hours. Yet on Tuesday, the MEMC loss was narrowed to less than 3%.

Another MEMC loss was another MEMC loss, and that makes more quarters in a row that the solar company has disappointed than can be counted on one, maybe even two hands, but it seems that some investors see value in sticking it out with MEMC, or in the least, that MEMC shares are already so beaten down it's already at a point where it can be held just based on book value. In fact, Citigroup analyst Timothy Arcuri raised MEMC from a buy to a hold on Tuesday, and several other analysts, including analysts at Kaufman Brothers and Stifel, reiterated buy ratings.

Stifel analysts wrote on Tuesday that, "We believe the tide is beginning to turn, and 2011 should show meaningful earnings leverage and we believe current valuation levels present a good entry point for long-term investors, all else being equal."

Kaufman Brothers analyst Jeff Bencik wrote on Tuesday that expectations for MEMC have been lowered significantly and improvements are coming that will significantly increase 2011 profitability. The analyst noted that the first stage of the MEMC solar wafering plant is expected to come online in the first quarter, which could add 10 basis points of margin. Similarly, the SunEdison segment is just starting to ramp, and as the revenues increase from the Rovigo sale and other projects, SunEdison will move from being a drag on earnings to a significant driver of earnings.

Even though the selling pressure on MEMC shares eased on Tuesday, volume didn't. There were 24 million MEMC shares traded on Tuesday, quadruple its average daily volume.

Wunderlich Securities analyst Theodore O'Neill described MEMC shares as "pretty washed out already. If MEMC got down to $10, it's like finding money on the street," the analyst said. "There has to be a positive surprise coming at some point," the analyst added.

MEMC Electronic Materials disappointed on several fronts in the third quarter, and the U.S. solar company was already under the gun to "put up or shut up" this quarter. Instead, it pushed the argument out, telling investors that the fourth quarter will see major revenue recognition from its solar project business, and that solar wafer sales are looking good headed into 2011.

On the basic earnings headline numbers, MEMC was behind the Street on the top line with revenue of $503 million, versus a consensus of $530 million from the Street. On the bottom line, MEMC missed by 5 cents, reporting earnings of 8 cents per share, non-GAAP (GAAP earnings were at 8 cents).

In addition to the earnings per share miss, MEMC's reliance on tolling for its wafer production hurt margins in what was a much larger part of its revenue in the quarter. This wasn't a big surprise, as wafer tolling has always experted a toll on MEMC margins from its solar materials unit.

"The profitability is not coming around as we thought," Oppenheimer & Co. analyst Gary Hsueh said, pointing to the solar materials unit becoming a larger part of revenue but leading to gross margin erosion. "Basically, they are telling a story that it's not a good quarter, margins aren't coming back around, and they aren't seeing the benefit of increased wafer prices," the analyst added.

Some analysts make the case that the quarter was simply the last stumble before MEMC regains its stride. Kaufman Brothers noted that the lumpiness of this business was the primary reason for the miss in the quarter and that should reverse in 4Q10. Yet that lumpiness is an issue that won't necessarily be going away.

An MEMC positive surprise has certainly proved elusive, and even as the Wunderlich analyst Theodore O'Neill looked for a silver lining in MEMC shares, he cautioned that the ongoing uncertainty about accounting for SunEdison project revenue could lead to more earnings surprises of the unwanted kind.

"Given the SunEdison business accounting treatment, MEMC is perpetually at risk of missing quarterly estimates," O'Neill said. While U.S. solar competitors

First Solar

(FSLR) - Get Report

and

SunPower

( SPWRA) are also making major efforts in the project pipeline market, in the Wunderlich analyst's opinion the SunEdison business makes it much more difficult to value MEMC, because it represents such a large percentage of revenue.

"One project has such a big impact," O'Neill said, as is the case with the Rovigo project for which revenue was backed up by at least one quarter by MEMC. "I think it's gonna take lots of pencil sharpening to figure out how to value MEMC with these kinds of issues," the analyst added, arguing that it's confusion that's likely to keep MEMC's price to earnings ratio compressed.

Jefferies analyst Jesse Pichel noted "investors' confusion" about MEMC in reiterating a hold rating, though unlike analysts arguing that MEMC was already at a low, the Jefferies analyst advised investors to await "a meaningful pullback."

The Wunderlich analyst noted that Street consensus revenue for MEMC in 2011 is $300 million higher than Wunderlich's forecast, and it isn't clear how the Street can assume this level when roughly $300 million to $500 million in 2011 is subject to revenue recognition issues that make the timing unpredictable.

Oppenheimer's Hsueh wrote in a research note that, "What really stuck in the craw of investors, however, was seeming lack of visibility on rev/margin recognition across SunEdison's sale of its 70 MW Rovigo project -- the company has all its ducks in a row, direct sale is still expected in Q4, but GAAP accounting has tripped up formal guidance."

The Oppenheimer analyst noted that there was no mention of any of these accounting complexities in the press releases trumpeting the Rovigo sale, MEMC's biggest solar project sale to date. "Everything seemed hunky dory with Rovigo previously," Hsueh said. The sale of Rovigo had been a rallying point for MEMC shares last month, when shares rose from the range of $11 to over $13.

"Given our financial performance year to date and the complexity and uncertainty surrounding the timing of GAAP profit recognition related to the Rovigo sale and other SunEdison direct sale project transactions, the company is suspending its 2010 EPS guidance," MEMC said in its earnings statement.

Keep in mind that MEMC had already suspended quarterly guidance, and last quarter merely provided the statement that it would miss its previous EPS guidance and nothing more than that. "That's the worst thing. We're only one quarter out from the end of the year and they can't even guide. It seemed like the worst last quarter when they said that EPS would miss but couldn't be more specific, yet now they don't have a clue," Oppenheimer's Hsueh said.

MEMC did spin a positive tale about the fourth quarter and about 2011 even while suspending guidance, stating that "the company expects strong revenue performance, the successful completion of Rovigo funding and positive free cash flow."

The Street commentary on the earnings seemed to reflect this view, more than a rush to final judgment on MEMC.

Given MEMC's "lost year" in 2010, it may not have that much more room to fall -- and MEMC is used to the $10 to $11 share territory. Some investors may give MEMC "one more quarter" to right the ship, a plea that MEMC's non-guidance outlook seemed to be asking investors to grant it.

-- Written by Eric Rosenbaum from New York.

>>Solar Losers: 5 Keys to the Power-One Selloff

>>Solar Inverter Stocks: Solar Winners & Losers

>>First Solar Muscles Investor Out of Event

Follow TheStreet.com on

Twitter

and become a fan on

Facebook.