WFR: MEMC Setback Illustrates Market Inefficiency
Studies of market efficiency tend to look at whether the reaction to news is swift, and whether that reaction persists for a few days. The idea is that if news is incorporated into the market price quickly then most people won’t be able to profit from trading on news. With that in mind, consider today’s SEC Filing from MEMC Electronics (WFR).
The company reported that mid-last week, a construction incident caused by one of its electrical subcontractors working on the Pasadena, Texas, polysilicon facility expansion resulted in a power outage to the entire site. Although the power was eventually restored later the same day, the unplanned and abrupt shutdown of high temperature and pressure chemical operations caused considerable complications. The facility is now in the late stages of recovery, but the abrupt nature of this incident, combined with the rain and thunderstorms in Pasadena, Texas over the last few days, has hampered the facility’s ability to recover operations expeditiously. This disruption has also caused the on-going polysilicon expansion project at the site to be additionally delayed. The combined effect of these events has resulted in an approximate one week impact to the company’s output for the quarter.As a result, the company is revising its Q3 guidance. Specifically, the company is now targeting revenues to be approximately 5% below the previously targeted level of $500 million and margins to be approximately flat sequentially from second quarter 2007 levels due to the associated costs.
Before market hours, the stock is trading down more than 5%. Clearly the reaction has been swift. But a 5% change in market cap based on a 5% change in one quarter’s revenue? There’s an inefficiency somewhere there.
For the record, I am not advocating any particular inefficiency in this article. It could be that Friday’s price was too high, or it could be that the market is overreacting to the news. The company is hosting a conference call at 9:00 to discuss the event, and it is possible that the regular market trading will reverse the pre-market reaction and leave the efficient market hypothesis fairly intact.
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