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.

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William Trent

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