After the closing bell last night, silicon-wafer producer MEMC Electronic Materials (NYSE: WFR) offered a mid-quarter update that's sent the shares reeling into negative territory this morning. The report started auspiciously enough, as CEO Nabeel Gareeb noted that current production rates "could allow us to achieve results in the upper half of our targeted financial range" of $560 million to $620 million in revenue.
His comment seemed to indicate that MEMC might exceed analysts' expected revenue of $596.7 million, as reported by Thomson Financial. But Gareeb then tempered his optimism by adding, "However, there is increased softness in demand from semiconductor applications customers, primarily due to their inventory reduction initiatives. These elements warrant a continued degree of caution in our outlook, given the amount of time left in the quarter."
Additionally, MEMC warned that it expects operating expenses of approximately $43 million for the third quarter, up from its previous projection of $41 million. The increase is largely attributable to one-time, non-cash severance-related expenses.
In early trading, WFR shares are more than 4% lower, extending their year-to-date decline of about 47%. The stock has slumped consistently since its late December peak at $96.08, which more than doubles its current share price. And, unfortunately, the widespread optimism toward the stock suggests that more downside might be in store as bullish sentiment unwinds.
For example, Zacks reports that 14 out of 15 brokers maintain a "buy" or better rating on WFR -- and 12 of those are emphatically bullish "strong buy" ratings. Any downgrades from these optimists could unleash more selling pressure on the shares.
Likewise, Thomson Financial pegs the average 12-month price target on WFR at $68.29, a lofty premium of 45% to the stock's closing price on Tuesday. Any downward revisions to this consensus estimate could prompt more bulls to flee their bets on the stock.
Even more troubling, a 33% drop in short interest during the most recent reporting period failed to give WFR much of a boost. The stock's inability to capitalize on this boost of buying pressure hints at deep-seated weakness in the shares. Plus, a recent breach of former support from the stock's 40-month moving average leaves WFR floundering on the charts, with no obvious floor in sight to staunch its slide.
In short, look for this stock to keep struggling as optimistic analysts and investors gradually vacate their stance on WFR.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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