Friday, January 28, 2011

Thoughts ahead of WFR's Q4

I've been an investor in WFR for about 2.5 long suffering years. The stock closed today at $11/sh (52 wk range is ~$9-$17).

MEMC Electronics reports earnings Tuesday Feb 1, and I'm nearly certain that Q4 will be a very strong quarter. Revenue and earnings will be up substantially from prior quarters. Consensus estimates predict 80% q on q revenue increase from ~$500M to ~$900M largely due to the SunEdison subsidary's sale of one large solar project--70MW Rovigo Italy.

Just for the sake of discussion, if this one plant sold for $5.5/W (several projects in Italy sold at higher prices earlier in 2010) that would represent $385M in revenue for the SunEdison subsidiary, a quantum jump over SunEdison's meager sales in q3. SunEdison built/sold other smaller solar plants in the quarter, but Rovigo was certainly the main event.

Meanwhile, given the continued strong demand for silicon in q4 (WFR's primary business is the sale of high grade silicon to both solar cell and semiconductor chip markets), it seems likely the silicon business will bring in at least the $480M in sales (probably closer to $530M assuming 10% q/q growth).

Unfortunately MEMC did not provide earnings guidance for q4 in q3, so we are left to speculate (or react if we wait until Tuesday's number's are reported). Estimates are all over the map--from $0.12 to $0.60 per share--with the consensus (if you can call it that) at $0.34/sh. Given an outstanding share count of ~227M that translates to ~$75M in net income for the quarter. (Net income was 17.6M GAAP or 22M non-Gaap in q3; $0.08 and $0.10 respectively.)

SunEdison was an earnings drag in q3 and will be an earnings star in q4. If SunEdison were simply to brake even in q4, WFR earnings would come in above $0.12/sh. Given the huge revenue SunEdison will generate in the quarter (it may be north of $400M) I expect earnings will be significantly stronger. For example if SunEdison is able to capture just $0.50 per watt as income that adds $35M to the bottom line (+ $0.15/sh) and I'd expect SunEdison is able to convert a much larger fraction of project revenue to earnings...but we won't know for sure until Tuesday.