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Is MEMC Electronic Materials' CEO Telling You to Buy?

By Rich Duprey – Nov 24, 2012 at 11:30AM

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If those in the know are buying this stock, maybe you should think about it too

Famed money manager Peter Lynch told us executives can sell their stock for any reason, but typically buy only for one: They think the price is going to go up!

Today I'm highlighting MEMC Electronic Materials (SUNEQ), the second-largest polysilicon maker in the U.S behind Dow Chemical's (DOW) Hemlock Semiconductor, which saw its president and CEO recently buy more than $200,000 worth of company stock. Additionally, director Steven Tesoriere bought more than $7 million worth of stock for Altai Capital Management, of which he's the managing partner. Now, these aren't option grants, either, but purchases made on the open market just like you and me.

MEMC Electronic Materials snapshot

 

 

Market Cap

$594 million

Revenues (TTM)

$2.7 billion

1-Year Stock Return

(38.4%)

Return on Investment

(38.9%)

Estimated 5-Year EPS Growth

15%

Dividend and Yield

N/A

Insider

Ahmad Chatila, president and CEO

Total Purchased

$203,300

Average Purchase Price

$2.43

Recent Price

$2.57

CAPS Rating (out of 5)

***

Source: FinViz.com. N/A = not applicable; MEMC Electronic Materials doesn't pay a dividend.

Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn't a call to buy, but just the inside track on a company you might want to check out further.

It's all fun and games
The polysilicon maker reported a third-quarter profit of $38 million, which on the surface looks a whole heck of a lot better than the $92 million loss it recorded a year ago, and since it also beat analyst expectations, an investor might be forgiven for believing the worst is over and an industry turnaround is at hand. But there's still too much uncertainty in the solar market right now to make such a call, and with the semiconductor wafer side of the business still reeling, we could see things deteriorate once again even as First Solar (FSLR -1.46%) and SunPower (SPWR -1.95%) report better-than-expected results.

Pricing in MEMC's solar-energy sector was cut in half in the third quarter, so even though it had greater project sales that helped drive revenues 46% higher than last year, margins were getting sliced. Because MEMC and Suntech Power (NYSE: STP) terminated their polysi agreement last year, there's substantial concern about being able to make up those volumes.

On the semiconductor side, revenues fell 10% as lower wafer volume growth and average selling prices sabotaged the business. There's little prospect for a turnaround in this segment, and MEMC expects revenues to drop another 4% to 10% in the fourth quarter.

The solar industry needs to come to grips with the bargain-basement pricing going on in the natural gas sector, and even with coal. Overall industry pricing is going to have to fall a lot further to become competitive with these low-cost energy sources, which can only point to a further narrowing of margins. And as profit margins falter and earnings per share follow, stock prices in general will head lower, too.

Trina Solar's (NYSE: TSL) cut guidance on shipments, as did Yingli Green Energy (NYSE: YGE), and the analysts at UBS say by Chinese operators for polysilicon dropped 34% last month. China's engaged in a trade tussle with both the U.S. and Europe, and protectionism on all sides seems likely to end up hurting everyone.

Although you have to respect MEMC's insiders putting their money where their mouth is, its results don't really portend any sustained healthy recovery, so I still don't expect much more out of the company despite its hopeful rhetoric. Count me among those still thinking the polysi maker will underperform the broad indexes on Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars. Although I'm among a small minority now and my CAPScall is slightly ahead of the game, I expect that to widen sooner rather than later.

But tell me in the comments box below whether you agree with the assessment that MEMC Electronic Materials can overcome industry oversupply and blight.

Rich Duprey and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar and Suntech Power Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$129.85 (-1.46%) $-1.92
SunPower Corporation Stock Quote
SunPower Corporation
SPWR
$24.69 (-1.95%) $0.49
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW
SunEdison, Inc. Stock Quote
SunEdison, Inc.
SUNEQ

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