MEMC (WFR) reported first quarter net sales of $501.4 million versus fourth quarter 2007 net sales of $535.9 million and first quarter 2007 net sales of $440.4 million. Non-GAAP diluted EPS, excluding warrants, was $0.84 per share, compared to the consensus analyst estimate of $0.85.

As previously disclosed, the impact associated with the accelerated chemical deposit buildups at the company’s Pasadena, Texas polysilicon manufacturing facility was the primary factor contributing to the sequential reduction in volumes, revenue and gross margin.

The problems in Pasadena continued after yesterday’s report. “The company reported that at approximately 4:20 PM this afternoon a transfer line from a transport vehicle developed a leak and caused a release of STF, a raw material gas used in the manufacturing process. The leak was quickly contained by the on-site emergency response team and the flow of material was stopped. At this time the company does not believe there was any offsite impact from the release due to the quick dissipation of the material in the atmosphere. Approximately 18 people were transported to area hospitals for further evaluation and/or treatment.”

During the first quarter, the company generated operating cash flow of $197.2 million, compared to $238.5 million in the 2007 fourth quarter. Capital expenditures for the first quarter totaled $81.9 million, or 16.3% of sales. The resulting lower trailing 12-month free cash flow yield curbs my enthusiasm for WFR shares.

“Although we are pleased with the results of the actions we have taken to address the issues that caused the lower than targeted polysilicon volume in the first quarter, given the unplanned issues that were encountered with our expected polysilicon ramp in the first quarter, we feel it is prudent to be extra cautious regarding our polysilicon output expectations in the second quarter. As a result, we are targeting revenues of approximately $540 to $570 million for the second quarter. In addition, we are targeting gross margin of approximately 54%-55%, with operating expenses of less than $40 million,” added Gareeb.
The consensus sales estimate for next quarter was $566 million.

The stock is looking to open down today, but I think if it can maintain above its 200-day moving average it will signal that investors continue to view the disruptions as temporary. Below the 200-day moving average, I’d say all bets are off.

Disclosure: At time of publication, William Trent holds no financial position in the companies mentioned in this article.

According to Digitimes, Polysilicon spot price drops 20% in two weeks:

Most industry players buy expensive polysilicon because they have scrap materials to mix with it, the sources explained. Most of these scrap materials are sourced from semiconductor companies, with overall volume being very limited. The brisk demand from the solar sector has also led to a surge in the price of scrap materials from US$100-200 per kilogram in 2006 to US$200-300 per kilogram in 2007. The average price of scrap materials currently is above US$300 per kilogram.

Tight polysilicon supply, combined with favorable long-term contracts with solar players, is a key reason MEMC Electronic Materials (WFR) is my favorite semiconductor play. I think the current situation, where the price went so high as to actually reduce demand, will be short-lived. Longer term, the supply and demand will meet at a clearing price. As long as the price is a solid one, MEMC should benefit.

Disclosure: At time of publication, William Trent has no position in the companies mentioned.

Disclosure: William Trent has a long position in SMH.

MEMC Electronic Materials (WFR)  reported that during the first quarter it experienced accelerated buildup of chemical deposits inside the new expansion unit (”Unit 3″) at its Pasadena, Texas facility and delayed maintenance on its other two units as a result. The combination of these items caused the utilization of the Pasadena facility to be approximately 20% lower than the fourth quarter, resulted in much lower than anticipated output, and caused the company to not achieve the financial targets for the first quarter as disclosed on January 24, 2008.The company now anticipates revenue for the first quarter will be approximately $500 million with gross margin of approximately 52% and operating expenses of approximately $42 million. This compares to the company’s previously announced targets of $560 million in revenue with gross margin of approximately 54.8% and operating expenses of approximately $42 million.

To me, this does not affect the long-term prospects for MEMC a bit. It does, however, illustrate that there are always risks to doing business. Many of these risks are not fully anticipated by investors.

If MEMC is riskier than investors previously thought, the stock decline is simply a result of applying a more appropriate discount factor for risk. If investors were close to the correct risk premium in previous estimates, I would expect the price to recover quickly.

Either way, it would not affect my own willingness to hold the stock, as I tend to believe these things happen more often than most people expect.

This article is a reprint of my January 7, 2008 RealMoney column.

I have said in other articles that I think the semiconductor industry supply and demand fundamentals argue for positive stock performance out of the group. My general belief is that the semiconductor manufacturers like Intel (INTC - Annual Report) should do better than the semiconductor equipment manufacturers like Applied Materials (AMAT - Annual Report).

Although I think investors can profit from an ETF play like the Semiconductor HOLDRS (SMH) or the ProShares Ultra Semiconductors (USD - Annual Report), I figured it was about time for me to get more specific and try to pick some stocks I think are poised to do even better than the industry as a whole.

The clear winner, in my opinion, is MEMC Electronic Materials (WFR). MEMC is a leading manufacturer of silicon wafers for semiconductor devices and solar cells. Its customers include virtually all of the major semiconductor device manufacturers in the world.

MEMC is benefiting from a shortage of wafers, which has boosted its pricing power and profitability. According to DigiTimes, insufficient supply of polysilicon has spurred the price of silicon wafers so high that solar industry players are considering using scrap wafers that have been already been buried for years.

The tight supply has caused MEMC to drain most of its inventory. Days sales in Inventory (DSI) have plummeted from nearly 70 two years ago to less than 30 in the latest quarter.

Source: Zacks Research Wizard, William A. Trent

What’s more, the short supply is allowing MEMC to enter into highly favorable long-term supply contracts, with pre-determined pricing, on a take or pay basis, customer-advanced funds in the form of a capacity reservation deposit and equity participation in the customer’s business.

On the latest conference call, management said that not only their current capacity, but their planned capacity increases were largely spoken for.

Margins dipped slightly in the September quarter due in part to an incident that caused the company to lose well over a week’s worth of polysilicon production at its Pasadena, Texas polysilicon facility. Overall, though, the tight capacity has been contributing to rapid expansion in gross profit margin for the company.

Source: Zacks Research Wizard, William A. Trent

The increasing sales and margins, of course, are causing a steady increase in earnings estimates. Over the last 90 days 2008 EPS estimates have risen from $4.06 per share to $4.19 per share. The Zacks Rank, a measure of earnings revision momentum, is 2. This places MEMC among the top 20% of companies for earnings revision performance.

Of course, even the strongest fundamentals will do investors no good if the stock is overvalued. Fortunately, I don’t think this is the case for WFR.

Over the last 12 months, MEMC generated more than $600 million in free cash flow, giving it a 3.2% free cash flow yield based on the current $18.8 billion enterprise value. This just happens to be right in line with the current yield on 5-year Treasuries.

So why buy a risky investment like MEMC when risk-free Treasuries offer the same yield? Because Treasuries don’t offer growth, and MEMC offers tons of it. The consensus 5-year growth rate is 30%, but based on its return on equity MEMC has a sustainable growth rate of nearly 55% (which happens to be its growth rate over the past five years.)

Heck, even the lowest growth estimate is 13%. I’d take that in today’s market environment.

It’s true that by some measures the stock looks overvalued. For example, it has a price/book ratio of nearly 12x – well above the semiconductor industry average of 2x. A reduction in the valuation multiple would offset some portion of that growth benefit.

Since total return must equal growth plus the change in valuation, let’s assume that over the next five years MEMC grows at the 30% consensus rate but has its price/book shrink to the industry average of 2x. No problem. The growth still overwhelms the change in valuation, and the indicated annual return is 25%.

In my opinion, no other semiconductor player even offers close to that opportunity.

Disclosure: William Trent is long Semiconductor HOLDRs (SMH) and Maxim Integrated Products (MXIM). He holds put options against the shares of Lam Research (LRCX).

Note: Get the best financial advice on the net and invest your money wisely!

William Trent currently owns put options against the shares of Lam Research (LRCX).

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.

Large Cap Watch List (Track at Marketocracy) member MEMC Electronic Materials, Inc. (NYSE: WFR) today reported financial results for the quarter ended June 30, 2007. Net sales of $472.7 million and earnings per share of $0.70 ($0.81 after the stuff they exclude but probably shouldn’t) compared with a consensus estimate of $466 million in sales and $0.76 in earnings per share.

Guidance was also strong:

Wafer inventory levels at some customers are still at somewhat elevated levels and could be back to normalized levels in the fall season. Demand from solar applications, however, continues to be healthy. Based on these customer indications, we are targeting revenues of approximately $500 million for the third quarter. We are also targeting margins to improve by approximately 100 basis points compared to the second quarter levels, with operating expenses of approximately $39 million.

For the full year 2007, we are currently targeting revenue of over $1.95 billion. In addition, we are now targeting non-GAAP EPS to be a little over $3.30 based on a cash tax rate in the mid-teens, and excluding any change in the Suntech warrant valuation. This would represent over 60% growth in non-GAAP EPS over the 2006 level of $2.06.

Next quarter’s revenue estimate is in line with consensus, and the full year estimates were previously at $1.94 billion in sales and $3.17 in EPS. The company’s own inventories continue to decline, reflecting the shortage of capacity for wafers in general. The company has announced capacity expansions but supply is likely to remain tight for some time, particularly if solar demand remains strong and semiconductor demand improves as I expect.

MEMC is the only semiconductor related company on my watch list, and there is a reason it got there.

Disclosure: William Trent has a long position in SMH.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

According to Semiconductor Equipment and Materials International (SEMI):

North American-based manufacturers of semiconductor equipment posted $1.65 billion in orders in June 2007 (three-month average basis) and a book-to-bill ratio of 0.94 according to the June 2007 Book-to-Bill Report published today by SEMI. A book-to-bill of 0.94 means that $94 worth of orders were received for every $100 of product billed for the month.

The figures for last month were also adjusted downward, indicating that it isn’t just the forecasts that should be taken with a grain of salt. I noted last month that the tiny upturn was probably a head-fake, and believe that the order growth trend will continue to decline for the highly unscientific reason that it always does.

The good news, of course, is that ordering less equipment will allow demand for semiconductors to catch back up with supply.

Disclosure: William Trent has a long position in SMH.

UPDATE 1-Chip equipment orders seen rising 1 pct this year | Reuters

Sales of equipment used to make microchips are seen rising 1 percent this year to $40.9 billion, cooling markedly from last year’s 23 percent growth, a U.S. industry group said on Monday.The market is expected to grow 7 percent in 2008 and 4 percent in 2009, Stanley Meyers, president of Semiconductor Equipment and Materials International told reporters.

A quick refresher on what these forecasts are worth. In December, SEMI forecast that sales “will grow in the single digits in 2007, and in the double digits in 2008. In 2009, growth is anticipated to be in the single digits with sales expected to hit $50.42 billion.”

I guess technically 1% is “single digits,” or digit anyway. But as I said at the time, and again last month, if the industry group is to be believed the current decline will mark the shortest semi equipment contraction in history. Which is a big part of the reason why I don’t believe it.

The fact is, industry trade groups exist to promote industry trade. Whether the National Association of Realtors or anyone else, the industry forecasts are generally overly optimistic. I look to such groups for their current and past data, not their forecasts.

According to trade group Semiconductor Equipment and Materials International (SEMI):

“Bookings and billings remain at levels above a year ago, and there is relative equilibrium in the book-to-bill ratio, which has remained very near parity for half of a year,” said Stanley T. Myers, president and CEO of SEMI. “We are surveying member companies and will issue a new consensus forecast outlook for capital equipment next month during SEMICON West.”

If the industry group is to be believed, the one-month semiconductor equipment sales decline in April will mark the shortest semi equipment contraction in history. Which is a big part of the reason why I don’t believe it.

The other part is that I’m hearing about more and more order pushouts of exactly the type I have been predicting here for over a year.

Don’t get me wrong - I think this is exactly what their customers need to be doing, which is why I have taken neutral to bullish outlook toward the semiconductor stocks.

Disclosure: William Trent has a long position in SMH.