WFR: MEMC Earnings Surprise Pattern Screeches to a Halt
Large Cap Watch List (Track at Marketocracy) member MEMC Electronic Materials, Inc. (WFR) reported earnings:
The company reported first quarter net sales of $440.4 million, which represents an increase of 4.7% from the fourth quarter 2006 level of $420.5 million. Gross margin in the quarter was $222.5 million, or 50.5% of net sales, compared to $203.3 million, or 48.3% of net sales, in the 2006 fourth quarter. Operating expenses totaled $34.8 million in the quarter, or 7.9% of sales, compared to $34.7 million, or 8.2% of sales, in the fourth quarter. Operating income in the quarter was $187.7 million, or 42.6% of net sales, compared to $168.6 million, or 40.1% of net sales, in the fourth quarter. Non- operating expense in the quarter includes a non-cash charge of $1.1 million, reflecting the required end of period valuation of the Suntech warrants.Using an estimated effective cash tax rate of 15%, non-GAAP net income for the first quarter of 2007 was $164.3 million and non-GAAP diluted EPS was $0.71. Net income for the first quarter, using a book tax rate of 30.2%, was $134.7 million and GAAP diluted EPS was $0.58. Both GAAP and non-GAAP EPS figures include $7.4 million in pre-tax stock compensation expense and a $1.1 million pre-tax charge relating to the Suntech warrants.
Analysts were expecting the company to earn $0.69 per share on $444 million in sales.
“Although the demand environment for some of our semiconductor customers is improving compared to a soft first quarter, the wafer inventory recovery seems to be lagging that improvement a bit because of their days of inventory; in addition, other customers seem to have remnant inventory issues from the holiday season. Demand from the solar market, however, continues to be healthy. Based on these customer indications, we are targeting revenues of approximately $460-$470 million for the second quarter. We are also targeting margins to improve by approximately 100 basis points compared to the first quarter, with operating expenses between $36-$37 million,” concluded Gareeb.
That would put the company at about $0.74 in EPS, spot on with the current consensus estimates. Shares traded down sharply after market hours, as the current valuation requires the company to beat numbers just to stay in place. As we said in our earnings preview, “Earnings surprises have been getting bigger each quarter. Now that we’ve put a semiconductor name on our Large Cap Watch List it will probably stop just to spite us.”
While there is no evidence the company actually curtailed sales to teach us a lesson, we do note that the solid balance sheet and working capital management are a breath of fresh air compared to what we have seen in the rest of the semicondutor space.
Disclosure: William Trent has a long position in SMH.
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