WFR: A Good Hedge if Fed Disappoints

MEMC Electronic Material (WFR – Last trade $58.82) reported last week that a construction incident at its Pasadena, Texas, polysilicon facility resulted in a power outage to the entire site. Although the power was eventually restored later that day, the unplanned and abrupt shutdown of high temperature and pressure chemical operations caused considerable complications. The facility is responsible for about 70% of their total production, and as a result the company said that they expect Q3 revenues to be approximately 5% below the previously targeted level of $500 million. They also said that margins are to be approximately flat sequentially from 2Q07 levels due to the associated costs.


The announcement was made before the open on September 4, and the stock price dropped from $58.73 to a low of $55.87 on September 7. The stock has now made a recovery as the market takes the view that this is a one-time issue, and that WFR's underlying business trend remains strong. On the conference call, it was noted that one week's lost production represents approximately 8% of 3Q07, but the company only expects a 5% reduction in revenue, pointing toward a possible better-than-expected 3Q before the disruption. It should also be noted that WFR's management has traditionally provided conservative guidance, raising the possibility of positive earnings surprises during Q4 as the company tries to make up for lost production.

Of course, company-specific news won't make much of a difference if Wall Street has to go on another selling spree. I still feel that markets are too optimistic about Fed rate cuts. Friday's jobs data was a shocker, and Bernanke's reaction on Tuesday convinced me that he isn't out to win a popularity contest. Come the September 18 meeting, I won't be surprised if the Fed chooses to leave rates unchanged, but cut the discount window rate again. The Fed has clearly stated it seeks not to re-inflate the housing bubble, and aggressive rate cuts will damage the U.S. dollar and boost inflationary pressures.

I think it's more likely that the Fed will disappoint markets and jittery investors pull the plug on stocks once again. WFR has a solid free cash flow profile, one of the main reasons why the company was the best performing solar stocks during the last round of selling. If past performance is a guide, then WFR looks like a good hedge against renewed risk aversion. 

Disclaimer: I do not own any of the stocks mentioned above. I don't own a solar panel.

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