MEMC Electronic MEMC Electronic Materials Materials (NYSE Ticker: WFR) (NYSE Ticker: WFR) Greg Bruno Tim Schmelzle Tom Wang Antti Zhang Tuesday, October 12, 2010
MEMC Electronic Materials MEMC Electronic Materials
(NYSE Ticker: WFR)(NYSE Ticker: WFR)
Greg BrunoTim Schmelzle
Tom Wang Antti Zhang
Tuesday, October 12, 2010
Presentation OutlinePresentation OutlineWFR Stock Purchase HistoryCompany OverviewIndustry OutlookHistorical & Recent Stock PerformanceAcquisition ActivitiesSWOT Analysis & Porter’s Five ForcesDuPont AnalysisCompetitor AnalysisFinancial Statement AnalysisFinancial Projections (DCF Valuations)Recommendation
WFR Stock Purchase WFR Stock Purchase HistoryHistoryMarch 2008: 200 shares were bought @
$78.15December 2008: 400 shares were bought @
$14.43Cost
basis=($78.15*200+$14.43*400)/(400+200) =$35.67 per share
October 8, 2010 Closing Price: $13.09Market Value of 600 shares: $7,854% Portfolio Holding = 2.39%Unrealized Loss=$35.67*600-$7,584= $13,548
or 63.3%
Company OverviewCompany OverviewMEMC, based in St. Peters, Missouri, is a
global leader in the manufacture and sale of wafers and related products to the semiconductor and solar industries.
Founded in 1959Employees 4,800 people worldwide2009: Recorded Sales of $1.2 billionStocks traded on New York Stock
Exchange and is included in the S&P 500 index
Data provided by www.memc.com as of October 10, 2010
Company Overview Company Overview
MEMC operates three business units:Semiconductor Materials ($7 billion market size)
◦ Manufactures silicon wafers which are used in building semiconductor devices
Solar Materials ($10 billion market size)◦ Manufactures silicon wafers which are used
in building solar cells and solar modulesSolar Energy ($39 billion market size)
◦ Sun Edison, MEMC’s subsidiary develops, finances, installs and operates solar power plants for its customers
Information provided by www.memc.com as of October 10, 2010
Global Sales and Global Sales and ManufacturingManufacturing
Image provided by www.memc.com as of October 10, 2010
What is a wafer?What is a wafer?
A thin slice of semiconductor material, such as silicon crystal, used in the fabrication of integrated circuits and other micro devices.
A solar wafer is a circular solar cell made from the entire wafer.
Wafers are formed of highly pure, nearly defect-free single crystalline material.
Wafers are the foundations upon which semiconductor and solar cells are built.
Image provided by www.memc.com as of October 10, 2010
Image provided by www.memc.com as of October 10, 2010
Industry OutlookIndustry Outlook Recent growth in the industry is not sustainable and is
attributed to a rebounding effect from the recent economic downturn. Growth for the remainder of 2010 is expected to continue diminishing from it’s present 27% to 6.3%, by 2011 and remain at 6.3% for the year. Growth is then expected to fall to the 4-5% range for the next several years.
Core growth in this industry is expected to come from cell phone sales and non-retail avenues, primarily commercial solar development and military use.
Consumer electronics outside of the cell phone industry is viewed as a mature sector with little growth.
Thin film technology promises to displace wafer technology within the solar industry at increasing rates and is expected by many to render wafer technology obsolete in time.Data provided by www.sia-
online.org as of October 10, 2010
Industry Revenue Industry Revenue
Chart produced by Yahoo Financewww.yahoo.com
Historical Stock Historical Stock PerformancePerformance
Chart produced by Yahoo Finance, October 9, 2010http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=
Historical PerformanceHistorical Performance
Chart produced by Yahoo Finance, October 9, 2010http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=
Recent Stock PerformanceRecent Stock Performance
Chart produced by Yahoo Finance, October 9, 2010http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=
Recent Stock PerformanceRecent Stock Performance
Chart produced by Yahoo Finance, October 9, 2010http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=
Acquisition ActivitiesAcquisition ActivitiesNovember 23, 2009 MEMC completed acquisition
of privately held Sun Edison, a developer of solar power projects and North America’s largest solar energy service provider. (Paid with $314 million, 70% cash, 30% MEMC stocks)
July 2, 2010 MEMC completed acquisition of privately held Solaicx. (Paid with $66 million cash, and plus $10 cash equivalent of investment in Solaicx.) The acquisition expected to be accretive to earnings per share in 2011.
Based on the MEMC’s recent frequent acquisition activities, we expect more acquisition activities will be initiated in the near future.
Information provided by www.sunedison.com & www.memc.com as of October 10, 2010
SWOT AnalysisSWOT Analysis Strengths
◦ Large Cash Reserves◦ Production of polysilicon◦ Internal sales to SunEdison
Weaknesses◦ Overcapitalized (Too much Capacity)◦ Recent investments in old technology◦ Competitors located in Japan / China◦ Several highly diversified competitors◦ Very low pricing power
SWOT AnalysisSWOT Analysis Opportunities
◦ Further diversification◦ Reductions to COGS◦ Acquisition into new technology◦ Increased adoption of SunEdison Power Plants
Threats◦ Slow/no growth economy◦ Fiscal Austerity◦ Protectionism◦ Wide adoption of different technology◦ IRS audit / Lawsuits
Porter’s Five ForcesPorter’s Five Forces Bargaining Power Suppliers – Low
◦ MEMC produces Polysilicon◦ Polysilicon price is market driven
Threat of New Entrants – High◦ Increased demand for existing fuels◦ Competitors patents / innovations◦ Semi business is already commoditized
Barriers to Entry – Medium High◦ High fixed capital costs / burn rate to start◦ Need for constant R&D and innovation◦ Govt subsidies and investor funds are available
Porter’s Five ForcesPorter’s Five Forces Bargaining Power of Buyers – Very High
◦ Short contracts for Semi-wafers (3-6 months)◦ MEMC is largely a price taker in Semi-wafers◦ Clean energy is a “like” not “need,” or “want”◦ Long term supply contracts for Solar wafers
Three out of four have since been renegotiated
Industry Rivalry – Very High◦ Multiple wafer companies competing on price◦ Semi-wafers are highly commoditized◦ Competition for subsidized projects◦ Competition for adoption by competing technologies
Semi-Materials and Solar-Materials Industry seems unattractive
DuPont AnalysisDuPont AnalysisProfit margin gets squeezed
during slowdown due to high fixed costs
DuPont Analysis
2009 2008 2007
Profit Margin -5.87% 19.33% 42.99%
Asset Turnover 32.63% 68.26% 66.56%
Equity Multiplyer 1.64 1.41 1.42
ROE -0.03 0.19 0.41
Data provided by Capital IQ as of September 17, 2010
Competitor AnalysisCompetitor Analysis Semiconductor Wafers
◦ Shin−Etsu Handotai Highest Market share at 32.4% Highly diversified Japanese company
◦ Sumco 29% Market Share
156mm Solar Wafers◦ LDK Solar
1.23B Market Cap; 1.10B 2009 Revenue◦ ReneSola
1.13B Market Cap; 510M 2009 Revenue Solar Energy Production
◦ First Solar Inc. 11.77B Market Cap; 2.07B 2009 Revenue Thin Film Solar
◦ SunPower Corp. 1.3B Market Cap; 1.52B 2009 Revenue
December 31, 2009 10-KYahoo Finance: Tickers LDK, SOL, FSLR, SPWRA respectively
Special MentionSpecial MentionHolding $285 million in Goodwill
from the purchase of SunEdison we value near $0
December 31, 2009 10-K Balance Sheet provided by EDGARS Online dated March 1, 2010
Key Income FactorsKey Income FactorsImportance Low
High
December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010
MEMC Sells a commodityMEMC Sells a commoditySales and cost containment of COGS are primary
drivers of profit. COGS are not driven directly by sales.
Sales
COGSF.A. Turnover Ratio: 1.0 3.6 3.4 2.9 2.4 2.8 2.7 2.1 .9
December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010
MEMC Cost ControlMEMC Cost Control“The larger 300 mm wafers enable lower production costs,
reducing the costs per individual component by approximately 30 percent.”
Nanotechnology interview with Craig Barrett, Intel CEO, June 15, 2004
http://www.azonano.com/news.asp?newsID=180
Sales
COGS
“MEMC Moves to Full-Scale 300mm Wafer Production”
BUSINESS WIREJan. 10, 2002 http://www.highbeam.com/doc/1G1-81567480.html
December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010
In 2002 MEMC deployed In 2002 MEMC deployed 300mm wafer technology300mm wafer technology
Sales
COGS
Adjusted: 2002 25%2003 25%2004 15%2005 5%
5.5% Historical growth patternDecember 31, 2009 10-K Income
Statement provided by EDGARS Online dated March 1, 2010
COGSCOGS
2005
2006
2007
2008
2009
Sales 1,107.4 1,540.6 1,921.8 2,004.5 1,163.6
F.A. T/O
Ratio 2.4 2.8 2.7 2.1 0.9
Imputed F.A.
461.42
550.21
711.78
954.52
1,292.89
Remove
Sun’s F.A.
-332
Net F.A. 461.42 550.21 711.78 954.52 960.89
Growth of F.A. has slowed to .66%, effectively 0%
ANOVA Results: R2 = 97.5% F-Stat = 58 T-Stat = 13.7Sales and ratios provided by
Capital IQ as of September 17, 2010
MEMC Cost ControlMEMC Cost ControlMEMC is completing the closure of their two largest manufacturing facilities 33%1by square footage compared to the total company to Malaysia. We estimate it will be able to produce 50% of the company’s total output at a 20% cost reduction. This effect has been incorporated into our model at diminishing returns over the next 10 years.
1MEMC 10-K (.pdf version) dated December 31, 2009: p21
DCF Analysis-Revenue Estimate
Sales Estimate is based on industrial analysis and comparison analysis
We separate SunEddison and MEMC’s traditional business-Wafer
COGS is calculated as a function of MEMC’s cost and SunEdison’s cost.
The COGS Margin is declining. Implying their restructuring effect
DCF Analysis-WACCCost of Debt
◦ 3 Level Rating Float: BB,BBB,A-◦ Weighted average by comparable analysis◦ 10 years US note
Cost of Equity◦ Beta
Unlevered Industrial Beta(NYU Report) Historical Beta (Yahoo Finance)
◦ Risk Premium Market Return (Bloomberg Estimate with
Adjustment) 10 years US note
◦ CPAM: WACC:15.28%
Float rate from Standard & Poor
DCF Monte Carlo Stimulation
By Crystal Ball
RecommendationRecommendationThe stock is currently trading at $13.09. Our intrinsic value for WFR is $14.14. We therefore recommend a modified holding strategy. Sell the original 200 shares at $13.09 and repurchase them after the waiting period to capture the unrealized loss. Estimated cash to fund would be approximately $3,900 while maintaining our position.