MEMC Electronic Materials
(NYSE Ticker: WFR)
Greg Bruno | Patrick Quirke | Charles Chen | Richard Wang
Thursday, March 3, 2010
Presentation Outline

Company Analysis

Solar Energy Industry

Semiconductor Material Industry

Performance Analysis and Stock
Valuation
Company Overview
Overview
 Net Sales by categories
 Acquisition Activities
 SWOT Analysis
 Competitors
 Management assessment

WFR Historical Holdings

March 2008: 200 shares were bought @ $78.15

December 2008: 400 shares were bought @ $14.43
Total Cost basis =$35.67 per share

Nov. 4 2011, 200 shares were sold @ $12.41.
Realized loss: $4,652

Dec. 6 2010, 200 shares were purchased @ $12.02

Mar. 2 2011 (current portion):
Closed price: $13.15 Portfolio: 2.32%
Unrealized gain: 3.64%
Company Overview

Main business: Manufacturer and seller of wafer

Sector: Technology

Industry: Semiconductor - Integrated Circuits , and Solar industry

Products:
◦ wafers in sizes from 100 millimerters (4 inch) to 300 millimeters (12 inch)
◦ Intermediate product : polysilicon, silane gas, ingots and scrap wafers
◦ Solar Energy Panels

Business segments: Semiconductor Materials, Solar Materials and
Solar Energy.

Market covering: Manufacturing and research and development
facilities in the United States, Europe and Asia pacific.

Customers: semiconductor device and solar cell (device)
manufacturers

S&P 500 stock traded on New York Stock Exchange.
Data provided by www.memc.com as of
October 10, 2010
Acquisition Activities

Acquisition of Sun Edison

November 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)
Acquisition of Solaicx

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
Acquisition outlook
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
WFR Stock Performance 2010
WFR Historical Stock Performance
Net Sales by Region, Business Segment
Image provided by www.memc.com as of
October 10, 2010
SWOT Analysis

Strengths
◦ Vertical integration
◦ Horizontal diversification
◦ Strong technology base supported by strategic and efficient R&D
◦ Strategic Long Term contracts

Weaknesses
◦ Overcapitalization
◦ Highly Leveraged
◦ Accumulated inventory from 3rd and 4th at 2010
SWOT Analysis

Opportunities
◦ Further diversification and gain share of renewable energy market
◦ Reductions to COGS
◦ Government support
◦ Increasing market demand for renewable energy nationwide

Threats
◦ Price competition in three segments
◦ Short-term over supply of polysilicon
◦ Imbalanced tax, regulatory, and trade policies
Competitors

Semiconductor Materials



Shin−Etsu Handotai : market shares: 25%, revenue:9,8B in 2010
Sumco: market shares: 15%, revenue: 2.4 B in 2010
Solar Materials
 LDK Solar: Cap: 1.88B revenue: 1.89B
 ReneSola: Cap: 0.8B revenue: 1B

Solar Energy
 First Solar Inc. Cap: 12.5B revenue:2.56B
 SunPower Corp. Cap: 1.66B revenue: 2.2 B
Management Assessment

Extended trend of steady improvement

SunEdison delivered strongest quarter to date

Semiconductor and solar end markets remain dynamic
◦ Increased market share in an environment of rising prices

Management expects GAAP sales in the range of $2.8 - $3.1
billion and EPS of $0.25 to $0.55
◦ Improve execution
◦ Continue strategic initiatives
Solar Energy Industry Analysis
Overview
 Performance in 2009
 Performance in 2010
 Drivers for industrial growth
 Porter’s Five Forces

Solar Energy Industry Overview

Solar energy products include Photovoltaics (PV),
concentrating solar power (CSP), and solar heating and
cooling (SHC)

U.S. PV market has grown at an average annual rate of 69%
over the past ten years, rising from just 3.9 megawatts (MW)
in 2000 to 435 MW in 2009

U.S. constituted only 6.5% of global PV demand in 2009,
placing fourth in national installations behind Germany, Italy,
and Japan. However, with continued pricing reductions and
strong incentives, the U.S. could become the next major PV
growth market
Solar Energy Industry - Performance in 2009
The U.S. was a net exporter of solar energy products in 2009, with
$723 million in net exports
 2009 U.S. solar installations created $3.6 billion in direct value, with
74% accruing to the U.S
 Polysilicon was the largest solar product export, with $1.1 billion in
exports in 2009
 The U.S. ranked fourth in the world for new solar electric
installations (Germany was first, Italy second, and Japan third)

Solar energy Industries Association 2009 report
http://seia.org/galleries/default-file/Trade_Balance_Factsheet.pdf
Solar Energy Industry - Performance in 2010

U.S. commercial solar customers added 103 megawatts of
capacity in the third quarter of 2010, which represents a 38%
jump over the third quarter of 2009

Cost per installed watt fell under $6 (before tax breaks), with
federal stimulus programs and state and local tax breaks

Worldwide, demand for just photovoltaic solar power grew
196% to 10.6 gigawatts in the first nine months of 2010

Definite signs pointing to a strong year in 2011, in light of the
solar energy tax legislation - Treasury Section 1603 Program
Solar energy Industries Association 2009 report
http://seia.org/galleries/default-file/Trade_Balance_Factsheet.pdf
Solar Energy Industry – Growth Drivers






Federal, state, and local policy incentives
Market volatility, especially with respect to natural gas and oil
Climate change and likely carbon regulations
Energy security issues
Need for increased energy production to meet growing
demand (China, India, etc.)
Interest from financial community in “next big thing”
Solar Energy Industry – Growth Drivers
•
•
•
•
•
•
•
November 23, 2009 MEMC completed acquisition of privately held Sun Edison
Sun Edison LLC owns and operates power plants in North America and
provides solar-generated energy to commercial, government, and utility
customers
Provides solar energy services, which include renewable power, monitoring,
marketing, renewable portfolio standards, and solar tariff services
As of 2010, it has more than 390 solar deployments worldwide
In 2010 it deployed more than 160 Megawatts of solar throughout the world
Including 28 MW of ground-mount and rooftop solar projects in Ontario
In Feb 2011, Sun Edison was awarded 31 Megawatts (MW) AC of solar
photovoltaic (PV) projects by The Ontario Power Authority (OPA) as part of the
province's landmark Feed-in Tariff (FIT*) program
Porter’s Five Forces Analysis - Solar

Bargaining Power of Suppliers – Low but increasing
◦ No any significant power given ready alternatives to solar energy in the market
◦ US government support – At least 30 states require that public utilities generate at
least 10% - 20% of power using clean energy.

Threat of New Entrants/Barriers to Entry – Medium to high
◦ High capital commitment
◦ Competitive industry

Bargaining Power of Buyers – High
 A wide variety of energy sources leaves consumers with the ability to choose

Competitive Industry Rivalry – Medium to high
◦ Little product differentiation
◦ Go Green campaign by US government
◦ High exit barriers due to high capital commitment
◦ Growing economy – increasing demand for poly-silicon to rooftop panels

Threat of Substitutes – High
 Coal (>50%), oil, other fossil fuels, wind, hydrogen, hydropower, nuclear and bioenergy
 Cost of electricity low using coal
 However increasing awareness of the Green House Effect makes people to prefer
clean energy
Semiconductor Industry Analysis
Characteristics
 Porter’s Five Forces Analysis
 Industry Performance Indicators
 Book to Bill Ratio Analysis
 Growth Expectations

Semiconductor Industry
Characteristics & Performance

Highly cyclical
◦ Reflects erratic, short-term oriented nature of the primary end market

Streamline operations and outsource production

2010 global semiconductors sales grew 31.8% to $226.3
billion and beat analyst forecasts of $219.7 billion
◦ Superior inventory management
◦ New product launches
◦ Strength in the consumer and computing markets
Data provided by www.sia-online.org as of
March 2, 2011
Porter’s Five Forces – Semiconductor
Industry

Bargaining Power of Suppliers – Medium
◦ Diffusion of risk over hundreds of companies minimizes individual supplier power
◦ Increasing dependence on “foundries” for cutting-edge equipment and production
skills increases bargaining power

Threat of New Entrants/Barriers to Entry – Medium, Decreasing
◦ Chip fabrication asset (capital) intensive and technologically advanced business that
requires billions of dollars in investment
◦ Alliances formed among semiconductor companies to spread manufacturing costs
◦ Success of “fabless” chip makers suggests that factory ownership may no longer bar
entrants from industry participation

Bargaining Power of Buyers – Low
 Industry segments dominated by small number of large players

Competitive Industry Rivalry – Very High, Increasing
◦ Intense price rivalries between individual companies
◦ Push for better, faster, and cheaper products creates short product life

Availability of Substitute Products – Low
 Fundamental building blocks of semiconductor devices
Semiconductor Industry Performance Indicators

Two main indicators of semiconductor equipment manufacturer performance:
◦ Order trends
◦ Relationship between current orders and sales, known as the book-to-bill ratio

A ratio above 1.00 indicates expansion, and one below 1.00 reflects a slowdown.

North America-based manufacturers of semiconductor equipment posted a
book-to-bill ratio of 0.85 in January 2011 compared to 0.90 in December
2010 and 0.97 in November

The January 2011 billings averaged US$1.80 billion, 2.5% more than the final
December 2010 level of and 88% higher than billings posted in January 2010

Slowing of the semiconductor manufacturing equipment market indicates
slower growth in IC capacity in 2011
◦ IC production should continue to increase in 2011 as IC demand remains healthy
◦ Semiconductor Intelligence believe IC capacity utilization will remain above 90%
through the end of 2011
Data provided by www.sia-online.org as
of October 10, 2010
Book to Bill Ratio Analysis
Industry Growth Expectations
Semiconductor Intelligence forecasts 9% growth in 2011 and 8%
growth in 2012
 Growth driven by:

◦ Underlying strength of electronic equipment production
◦ Continued moderate recovery from a deep recession

Unlikely to move into excess capacity for at least 1-2 years

Equipment billings should grow in 2011 by about 10% to 20%

IC and wafer demand will continue to grow as IC capacity grows in
2011

IC wafer starts should grow about 10% in 2011 over 2010
◦ Growth in IC capacity should be slightly higher than growth in wafer starts
◦ IC capacity utilization will remain above 90% throughout 2011
Data provided by HIS iSuppli Forecasts as
of February 17, 2011
http://www.digitimes.com/news/a20110217P
R201.html
Valuation
DuPont Analysis
 FCF Analysis
 DCF Valuation
 Public Comparables – Multiples
Valuation
 Triangulated Valuation
 Recommendation

DuPont Analysis
DuPont Analysis
For the Fiscal Period Ending
2005
2006
2007
2008
2009
2010
Gross Profit Margin
33.1%
44.7%
52.1%
50.1%
11.0%
15.1%
Assets Turnover
96.4%
87.2%
66.6%
68.2%
32.6%
48.5%
Equity Multiplier
151.9% 146.5% 139.4% 138.8%
161.6%
200.9%
ROE
48.5%
57.2%
48.3%
47.5%
5.8%
14.7%
2005
2006
2007
2008
2009
2010
GPM YoY Change
35.1%
16.4%
-3.7%
-78.0%
36.7%
Asset Turnover YoY Change
-9.5%
-23.7%
2.5%
-52.2%
48.8%
Equity Multiplier YoY Change
-3.6%
-4.8%
-0.5%
16.5%
24.3%
-104.0%
-1.9%
-97.6% -5373.3%
DuPont Analysis
For the Fiscal Period Ending
ROE YoY Change
11.4%
FCF Analysis
Cash Flows ($ Million)
Forecast
2011
2012
2013
2014
2015
2016
2017
Free Cash Flow
Net Income
312.10
311.26
263.25
196.71
268.29
338.54
336.95
183.75
200.12
213.12
225.24
238.10
249.74
263.30
$495.85
$511.38
$476.37
$421.95
$506.40
$588.28
$600.25
Changes in Accounts Receivable
($34.04)
($29.40)
($23.35)
($21.77)
($23.09)
($20.91)
($24.35)
Changes in Inventories
($51.03)
($67.87)
($96.79)
($142.53)
($223.59)
($239.74)
($325.00)
($122.02)
$9.12
$10.14
$12.15
$4.96
($17.13)
$3.85
Changes in Other Current Assets
($41.20)
($72.68)
$84.91
($6.00)
$3.38
($24.64)
$6.16
Changes in Accounts Payable
$177.29
$235.76
$336.24
$495.14
$776.73
$832.82
$1,129.02
$6.52
$4.53
$3.66
$3.44
$3.64
$3.34
$3.84
$21.40
$14.87
$12.02
$11.30
$11.96
$10.95
$12.61
Total Change in Net Working Capital
($43.09)
$94.33
$326.83
$351.73
$553.98
$544.68
$806.13
Operating Cash Flow
$452.76
$605.71
$803.21
$773.68
$1,060.38
$1,132.96
$1,406.38
SunEdison Net Financing
$543.85
$487.88
$436.76
$383.22
$330.89
$277.95
$225.32
(1000.00)
(529.51)
(593.39)
(659.87)
(696.14)
(684.63)
(738.55)
(547.24)
76.20
209.81
113.81
364.24
448.33
667.83
Depreciation & Amortization
Gross Cash Flow
Changes in Prepaid Expense
Changes in Accrued Expenses
Changes in Other Current Liabilities
Capital Expenditures (Additions to PP&E)
Free Cash Flow
DCF Valuation
Forecast
Present Value of Free Cash Flows
2011
Discount factor
PV of Unlevered Free cash flow
Sum of FCF
2013
2014
2015
2016
2017
1.11
1.22
1.35
1.50
1.65
1.83
2.02
(494.9)
62.3
155.2
76.1
220.3
245.2
330.2
594.36
Equity Value Caculation
Terminal Value
Discount Rate
13.00%
Terminal Growth/ Perpetuity
Rate
4.00%
Free cash flow (2017)
694.5
Terminal value
7,717.1
PV of terminal value
3,816.1
Enterprise value
2012
4,410.4
Risk-Free Rate
3.41%
Market Risk Premium
6.00%
Calculation of net debt:
Current portion of LT and ST debt
Long term debt
Convertible debt
Minority interest
Convertible preferred stock
Less: Cash
Less: short-term Investments
Net debt
Total Firm Value
72.1
610.6
0.0
43.9
0.0
707.3
0.1
19.2
4410.4
Beta
% Equity
81.4%
Equity Value
3727.7
% Debt
18.6%
Shares outstanding
227.9
Tax Rate
35.0%
Equity value / Share
16.36
WACC
10.58%
1.27
CAPM
11.03%
Goal-Post k(e)
12.00%
k(d)
6.7600%
Public Comparables – Multiples Valuation
Public Comparables
Competitor
Segment
P/S
P/B
Forward P/E
Shin-Etsu Co. Ltd.
Semiconductor
1.62
1.39
16.30
8.10
Sumco Corporation
ReneSola Ltd.
Semiconductor
Solar Materials
2.28
1.33
2.09
1.97
-
11.10
4.49
Trina Solar Ltd.
LDK Solar Co., Ltd.
Solar Materials
Solar Materials
1.15
1.99
1.79
2.28
6.60
4.90
3.90
9.90
Covalent Materials Corporation
Solar Materials
-
-
-
-
SolarWorld AG
First Solar, Inc.
Solar Materials
Solar Energy
0.99
4.94
1.14
4.42
14.40
16.80
6.90
13.29
Solar Energy
0.88
1.36
8.60
6.76
1.50
1.78
13.80
16.58
Minimum
8.68
Average
19.98
Maximum
48.75
Median
14.80
P/B
Forward P/E
1.60
0.74
2.83
1.74
6.19
2.52
2.51
2.07
EV/EBITDA
3.90
9.00
16.58
8.10
SunPower Corporation
MEMC Electronic Materials Inc.
WFR Ratios
Normalized EPS
2/28/2010
0.15
Book Value Per Share
Revenue
1.40
2239.20
Shares Outstanding
Revenue/ Share
226.90
9.87
Multiples
P/S
EV/EBITDA
Triangulated Valuation
Current Stock Price:
$13.15
Method
DCF Valuation
EV/EBITDA
Price/Sales
Weight
50%
25%
25%
Weighted Valuation:
-10%
Valuation
+10%
Valuation
$16.36
$8.55
$17.39
$14.67
$13.20
$14.67
$16.13
Recommendation

Hold position of 600 shares