MEMC Electronic Materials
Michael Bellisario
Zach Chen
Suyang Sean Hong
Vignesh Murali
Ron Yang
Tuesday, April 13, 2010
Ticker: WFR (NYSE)
MEMC Electronic Materials
• Purchase History
• Business Overview
• Industry Analysis
• SWOT Analysis & Porter’s Five Forces
• Competitor Analysis
• Multiples Valuation
• Historical & Recent Stock Performance
• Financial Statements Analysis
• Management Assessment
• DCF Valuation & Recommendation
Purchase History
• March 2008 – Bought 200 shares @ $78.15
• December 2008 – Bought 400 shares @ $14.43
• Cost basis - $35.67/share
• April 9, 2010 Closing Price - $15.96
• Market value of holding (600 shares) = $9,576
• 2.9% of total portfolio, 8.5% ex-cash (not including BGC)
• Unrealized loss of 55.3% or $11,826
• Recommendation = HOLD
Business Overview
• MEMC designs, manufactures, and sells silicon wafers
•Semiconductor wafers and solar wafers
•Solar “projects” through Sun Edison
• Based in St. Peters, MO
• One of four wafer companies with 10%+ market share
• NYSE Ticker: WFR
What is a wafer?
• Wafers are the foundation on
which the world’s
semiconductors and solar cells
are built
• All the processes of a micro
device are conducted on a
wafer
• Increased wafer sizes have
increased device performance
and reduced production costs
50mm, 100mm, 150mm & 200 mm wafers (top)
45nm (bottom)
Geographic Presence
Source: 2009 Annual Report
Business Overview
• Semiconductor Materials ($7B market size)
• Continuous technological development and product
innovation
• Solar Materials ($10B market size)
• Intense cost pressures and competition from thin-film
technologies
• Solar Energy ($39B market size)
• Very competitive in terms of pricing and continuing
evolution of technologies
Historical Demand
Semiconductor
Forecasted Demand
Sun Edison Acquisition
• November 20, 2009
• Vertical integration strategy – closer to end customer
• North America’s largest solar energy service provider
• Development of solar power plants and
commercialization of solar energy
• Solar project “manager”
• Construction & selling solar projects
• Selling electricity
• Ongoing maintenance & solar services
Sun Edison Acquisition
• Business segment realignment
Solar Materials
Materials Business
Semiconductor Materials
Solar Energy (Sun Edison)
• Sun Edison will retain name, become subsidiary of MEMC
• $314.6 million purchase price
• Negative initial reaction by market
• $285 million of goodwill, $300+ million of debt
• Increased customer base
• Kohl’s, Staples, City of San Diego, Xcel Energy
Sun Edison Acquisition
• Global Solar Capacity
• Expandable Market
ROW
Japan
China
India
U.S.
Canada
France
Italy
Spain
Germany
Source: 2010 Capital Markets Day Presentation
Sun Edison
Sun Edison Acquisition
• 100+ Mws under management
• 3 billion kw/hrs contracted for 20 years
• 2009 accomplishments: 40 Mw, 135 systems installed
• 2010 goals: >100 Mws installed, 1 Gw backlog
• MEMC’s growth going forward/highly uncertain though
• 20-yr contract, price pegged at or below cost of grid power
• Economically sensible only when there are substantial
subsidies (Spain)
Sun Edison Acquisition
• Customer Success Story – Kohl’s
• Largest rooftop solar rollout in U.S. history
• System Type: Roof-mounted solar panels
• System Size: 25 megawatts across 65 sites in California
• Annual Savings: Reduced energy operating expenses
• Capital outlay for Kohl’s: $0
• System will provide 20-30% of each store’s power
SWOT Analysis - Strengths
• 50 years in the wafer industry
• Wide range of products
• Diversified geographic presence
• Sales in U.S. , Taiwan, China, Europe
• Strategic long term contracts
• 10-yr contracts worth about $10-12.5 billion
• Strong R&D
• $40 million in 2009
SWOT Analysis - Weaknesses
• Operating disruptions
• Equipment failure in August 2009 at Pasadena, Texas
facility  decreased sales and gross margins
• Low operating efficiency
• Declining asset turnover
• Reduced financial flexibility
• Significant capital diverted to Sun Edison business
SWOT Analysis - Opportunities
• Long-term growth in renewable energy
• Potential increase in government support and
investor demand as oil/commodity prices rise
• Rebound in semiconductor shipments worldwide
• Solar projects become more attractive as costs come
down due to technology improvements
SWOT Analysis - Threats
• Government subsidies
• Sun Edison would not be profitable without favorable
government subsidies
• Concentration of the buyers
• One customer in Materials Business accounted for
23% of 2009 revenues
• Top three customers accounted for 39% of 2009 total
revenues
Porter’s Five Forces
Porter's Five Forces
New Entrants
Competition
Substitution
Bargaining Power of
Customers
Bargaining Power of
Suppliers
Competitors
• Based on the following criteria:
• Initial list of competitors provided by MEMC’s 10-k
• Biggest competitors from each segment (solar
wafers, semiconductor wafers, and solar projects)
• Attempted to match revenues and markets
Trina Solar
• Integrated solar-power products manufacturer
• Based in China with customers throughout the world
• Major competitor of MEMC in Germany, Spain, Italy,
and the United States
• Currently produces more solar energy (megawatts) than
MEMC
Shin-Etsu
• Japanese-based chemical manufacturing company
• Wafer manufacturing = 40% of revenues, 41% of total
assets
• Wafer sales 3x greater than MEMC’s wafer sales
• Net income fell 60% last year
SUMCO
• Japanese-based manufacturing company mainly
engaged in silicon production
• Also produces silicon wafers for solar batteries
• Similar in size and revenues to WFR
• Revenues decreased 44% due to lower demand in North
America and Japan (~85% of total revenue)
SolarWorld AG
• German-based manufacturer of silicon solar wafers,
solar cells, and solar modules
• Competes with WFR in the solar cells and panels
segment
• Top industry participant
• 38% drop in net income year-over-year
Sun Edison Competitors
• First Solar
• Manufacturer of solar modules and solar power
systems based in Tempe, AZ
• Acquired OptiSolar to increase exposure to solar
power project development
• Revenues of $2.7B (66% increase year-over-year)
• SunPower
• Producer of high performance solar electric power
technologies (solar panels & invertors)
• Acquired Tilt Solar in 2009
• Revenues of $977M
Multiples Valuation
• More weight toward P/B and P/S as they were more
stable than EV/EBITDA
• Out of the eight competitors, most had negative
earnings history; therefore we used forward P/E
Multiples Valuation
Company
P/S
P/B
EV/EBITDA
Forward
P/E
Semi
Shin-Etsu Co.
1.94
1.71
6.32
29.38
Semi
SUMCO
2.25
1.86
-
-
Solar
SolarWorld AG
1.18
1.45
7.11
10.2
Solar
Trina Solar
2.00
2.80
76.00
13.8
Solar
ReneSola
0.70
0.98
-
9.89
Solar
LDK Solar
0.78
1.39
-
10.89
SunEd
SunPower
1.16
1.25
9.60
9.02
SunEd
First Solar
4.81
3.74
12.00
17.26
MEMC Electronics
3.07
1.65
8.98
20.64
Valuation Method
Weight
Multiples Range
P/S
40%
Low
High
P/B
40%
$6.54
$28.58
EV/EBITDA
0%
Forward P/E
20%
Multiples Valuation
$13.21
Historical Performance
Massive cost cutting,
profitable by FY2003
TPG bailout,
avoided bankruptcy
Solar wafer
introduction
CEO resigns
Source: Yahoo! Finance
Recent Performance
Q2 results, sales at
low end of guidance
Positive 2010
guidance, Sun
Edison clarity
New CEO
New CFO
Stock
bottoms
Source: Yahoo! Finance
Q3 results, Sun Edison
announcement
Market
bottoms
Profitability
Revenue Vs COGs
2,500.0
60.0%
50.0%
2,000.0
40.0%
1,500.0
30.0%
1,000.0
20.0%
500.0
10.0%
0
0.0%
2005
2006
2007
2008
2009
Proliferate market resulted in oversupply
Gross Profit
COGS
Margin %
Profitability
SG&A
180
0.16
160
0.14
140
0.12
120
0.1
100
0.08
80
Selling General & Admin
Exp.
SG A %
0.06
60
0.04
40
0.02
20
0
0
2004
2005
2006
2007
2008
2009
Management failed to control SG&A when sales fell
Liquidity
ST Liquidity
4.0x
600.0
3.5x
500.0
3.0x
400.0
2.5x
Total Current Liabilities
2.0x
300.0
Current Ratio
Quick Ratio
1.5x
200.0
1.0x
100.0
0.5x
0.0x
0
2004
2005
2006
2007
2008
2009
Hold large amount of cash/buffered the impact of ST debt
Efficiency
ST Efficiency
2,500.0
18.0x
16.0x
2,000.0
14.0x
12.0x
1,500.0
Revenue
10.0x
1,000.0
8.0x
Accounts Receivable
Turnover
6.0x
Inventory Turnover
4.0x
500.0
2.0x
0
0.0x
2004
2005
2006
2007
2008
2009
Inventory is highly correlated to sales
Efficiency
LT Efficiency
2,500.0
3.5x
3.0x
2,000.0
2.5x
1,500.0
2.0x
1.5x
1,000.0
1.0x
500.0
0.5x
0
0.0x
2004
2005
2006
2007
2008
2009
Declining operating efficiency
Revenue
Total Asset Turnover
Fixed Asset Turnover
DuPont Analysis
DuPont Analysis
2004
2005
2006
2007
2008
2009
EBIT margin
25.2%
23.2%
36.2%
44.2%
42.5%
-6.4%
EBT/ EBIT
75.9%
98.2%
105.8%
130.8%
68.7%
150.9%
Net Income/ EBT
114.9%
98.8%
62.5%
74.3%
66.2%
61.0%
Assets Turnover
100.0%
96.5%
87.3%
66.6%
68.3%
32.7%
Financial Leverage
232.2%
161.4%
151.3%
141.9%
141.1%
164.1%
51.1%
35.1%
31.6%
40.6%
18.6%
-3.1%
ROE
DuPont Analysis
ROE
EBIT Margin
70.0%
50.0%
60.0%
40.0%
50.0%
40.0%
30.0%
30.0%
20.0%
20.0%
10.0%
10.0%
0.0%
0.0%
-10.0%
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
2009
-10.0%
Assets Turnover
Financial Leverage
120.0%
250.0%
100.0%
200.0%
80.0%
150.0%
60.0%
100.0%
40.0%
50.0%
20.0%
0.0%
0.0%
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
2009
Management Assessment
• Revised Q3 guidance (Sept.): $285-315 million in revenues,
gross margins in “mid to high single digits”
• Q3 actual: $315 million in revenues, gross margins 6.6%
• Q4 guidance (Oct.): $310-350 million in revenues, gross
margins 10-14%
• Q4 actual: $357 million in revenues, gross margins 14.9%
• Capital Markets Day presentation – CFO said he would
release updated financials in one month; EDGAR filing in
exactly one month
Revenue Assumptions
Solar Energy
(SunEdison)
Materials Business
Semiconductor Materials
Growth
2007
Sales
% of
Total
1,216.9
63.3%
Materials
Business Total
Solar Materials
Growth
MEMC Total
Sales
% of
Total
Growth
Sales
Growth
Sales
% of
Total
Growth
Sales
704.9
36.7%
25.0%
1,921.8
N/A
0.0
N/A
25.0%
1,921.8
2008
-24.1%
923.1
46.1%
53.4%
1,081.4
53.9%
4.3%
2,004.5
N/A
0.0
N/A
4.3%
2,004.5
2009
-36.5%
586.3
50.4%
-47.0%
573.5
49.3%
-42.1%
1,159.8
N/A
3.8
0.3%
-42.0%
1,163.6
2010E
40.0%
820.8
50.2%
7.0%
613.6
37.5%
23.7%
1,434.5
N/A
200.0
12.2%
40.5%
1,634.5
2011E
8.0%
886.5
49.5%
10.0%
675.0
37.7%
8.9%
1,561.5
15.0%
230.0
12.8%
9.6%
1,791.5
2012E
8.0%
957.4
48.7%
10.0%
742.5
37.8%
8.9%
1,699.9
15.0%
264.5
13.5%
9.7%
1,964.4
2013E
-5.0%
909.5
49.7%
-10.0%
668.3
36.5%
-7.2%
1,577.8
-5.0%
251.3
13.7%
-6.9%
1,829.1
2014E
8.0%
982.3
49.1%
10.0%
735.1
36.8%
8.8%
1,717.4
12.0%
281.4
14.1%
9.3%
1,998.8
2015E
8.0%
1,060.9
47.3%
15.0%
845.3
37.7%
11.0%
1,906.2
20.0%
337.7
15.1%
12.3%
2,243.9
2016E
8.0%
1,145.8
46.5%
10.0%
929.9
37.7%
8.9%
2,075.6
15.0%
388.4
15.8%
9.8%
2,464.0
Discount Rate Calculation
Risk-Free Rate
4.00%
5.00%
Market Risk
Premium
5.00%
6.00%
1.75
12.75%
Beta
CAPM
k(e) WFR
Market Return (5-yr)
0.69%
1.75
WFR ROE (5-yr)
7.24%
15.50%
CAPM Expected
-2.17%
WFR Alpha
9.41%
15.50%
Goalpost cost of equity = 15.5%
k(d) WFR
6.00%
% Equity
89.6%
% Debt
10.4%
Tax Rate
WACC
25%
14.36%
Adjusted Discount Rate = 15%
DCF Analysis
• Current stock price: $15.96
• 15% discount rate
• 4% growth rate
• DCF price: $12.40
Sensitivity Analysis
Discount Rate
Growth Rate
12.40
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
2.5%
16.61
14.39
12.58
11.07
9.80
8.72
7.79
3.0%
17.44
15.03
13.08
11.48
10.13
8.99
8.02
3.5%
18.36
15.74
13.64
11.92
10.49
9.28
8.26
4.0%
19.41
16.53
14.25
12.40
10.88
9.60
8.52
4.5%
20.59
17.41
14.92
12.93
11.30
9.94
8.80
5.0%
21.94
18.40
15.67
13.51
11.76
10.31
9.10
5.5%
23.50
19.53
16.51
14.15
12.26
10.71
9.42
Recommendation
• HOLD current 600 shares
•Fair market value = $12.40 (DCF) - $13.21 (Multiples)
•Plus $1.70/share in excess cash & ST-investments
•High-low yearly price change = 108%
•Fair market range = $8.30 - $17.20
•Current market price = $15.96
• What to watch for:
•Materials Business margins/pricing pressure
•Government subsidies
•Sun Edison ramp-up/profitability/transparency