MEMC Electronic Materials
(NYSE Ticker: WFR)
Greg Bruno
Tim Schmelzle
Tom Wang
Antti Zhang
Tuesday, October 12, 2010
Presentation Outline
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WFR Stock Purchase History
Company Overview
Industry Outlook
Historical & Recent Stock Performance
Acquisition Activities
SWOT Analysis & Porter’s Five Forces
DuPont Analysis
Competitor Analysis
Financial Statement Analysis
Financial Projections (DCF Valuations)
Recommendation
WFR Stock Purchase History
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March 2008: 200 shares were bought @ $78.15
December 2008: 400 shares were bought @
$14.43
Cost basis=($78.15*200+$14.43*400)/(400+200)
=$35.67 per share
October 8, 2010 Closing Price: $13.09
Market Value of 600 shares: $7,854
% Portfolio Holding = 2.39%
Unrealized Loss=$35.67*600-$7,584= $13,548 or
63.3%
Company Overview
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MEMC, 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 1959
Employees 4,800 people worldwide
2009: Recorded Sales of $1.2 billion
Stocks 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
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 modules
 Solar 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 Manufacturing
Image provided by www.memc.com as
of October 10, 2010
What is a wafer?
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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 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.
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Data provided by www.sia-online.org as
of October 10, 2010
Industry Revenue
Chart produced by Yahoo Finance
www.yahoo.com
Historical Stock Performance
Chart produced by Yahoo Finance, October 9, 2010
http://finance.yahoo.com/echarts?s=WFR+Interactive#
symbol=WFR;range=
Historical Performance
Chart produced by Yahoo Finance, October 9, 2010
http://finance.yahoo.com/echarts?s=WFR+Interactive#
symbol=WFR;range=
Recent Stock Performance
Chart produced by Yahoo Finance, October 9, 2010
http://finance.yahoo.com/echarts?s=WFR+Interactive#
symbol=WFR;range=
Recent Stock Performance
Chart produced by Yahoo Finance, October 9, 2010
http://finance.yahoo.com/echarts?s=WFR+Interactive#
symbol=WFR;range=
Acquisition Activities
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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)
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 Analysis
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Strengths
◦ Large Cash Reserves
◦ Production of polysilicon
◦ Internal sales to SunEdison
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Weaknesses
◦ Overcapitalized (Too much Capacity)
◦ Recent investments in old technology
◦ Competitors located in Japan / China
◦ Several highly diversified competitors
◦ Very low pricing power
SWOT Analysis
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Opportunities
◦ Further diversification
◦ Reductions to COGS
◦ Acquisition into new technology
◦ Increased adoption of SunEdison Power Plants
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Threats
◦ Slow/no growth economy
◦ Fiscal Austerity
◦ Protectionism
◦ Wide adoption of different technology
◦ IRS audit / Lawsuits
Porter’s Five Forces
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Bargaining Power Suppliers – Low
◦ MEMC produces Polysilicon
◦ Polysilicon price is market driven
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Threat of New Entrants – High
◦ Increased demand for existing fuels
◦ Competitors patents / innovations
◦ Semi business is already commoditized
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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 Forces
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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
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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
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Semi-Materials and Solar-Materials Industry seems unattractive
DuPont Analysis
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Profit 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 Analysis
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Semiconductor Wafers
◦ Shin−Etsu Handotai
 Highest Market share at 32.4%
 Highly diversified Japanese company
◦ Sumco
 29% Market Share
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156mm Solar Wafers
◦ LDK Solar
 1.23B Market Cap; 1.10B 2009 Revenue
◦ ReneSola
 1.13B Market Cap; 510M 2009 Revenue
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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-K
Yahoo Finance: Tickers LDK, SOL, FSLR, SPWRA respectively
Special Mention
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Holding $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 Factors
Importance
R&D
$40.4 Mill
Low
Marketing and
Administrative
$161.9 Mill
COGS
$1,035 Mill
Sales: $1,164 Mill
December 31, 2009 10-K Income Statement
provided by EDGARS Online dated March 1,
2010
High
MEMC Sells a commodity
Sales and cost containment of COGS are primary drivers of
profit. COGS are not driven directly by sales.
2,500.0
2,000.0
1,500.0
Sales
1,000.0
COGS
500.0
F.A. Turnover Ratio: 0 1.0 3.6
2001
2002
3.4
2.9
2.4
2.8
2.7
2003
2004
2005
2006
2007
December 31, 2009 10-K Income Statement
provided by EDGARS Online dated March 1, 2010
2.1 .9
2008
2009
MEMC 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
“MEMC Moves to
Full-Scale 300mm
Wafer Production”
BUSINESS WIRE
Jan. 10, 2002
Sales
http://www.highbeam.com/doc/1G181567480.html
COGS
2001
2002
2003
2004
2005
2006
December 31, 2009 10-K Income Statement
provided by EDGARS Online dated March 1, 2010
2007
2008
2009
In 2002 MEMC deployed 300mm
wafer technology
Adjusted:
2002 25%
2003 25%
2004 15%
2005
5%
Sales
COGS
2001
2002
2003
2004
2005
2006
December 31, 2009 10-K Income Statement
provided by EDGARS Online dated March 1, 2010
2007
2008
5.5%
Historical
growth
pattern
2009
COGS
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 Imputed
F.A.
Ratio
2.4
2.8
2.7
2.1
0.9
461.42
550.21
711.78
954.52
1,292.89
Remove
Sun’s F.A.
Net
F.A.
-332
461.42
550.21
711.78
954.52
960.89
ANOVA Results:
of 58
F.A. T-Stat
has slowed
R2 = 97.5% Growth
F-Stat =
= 13.7to
.66%, effectively 0%
Sales and ratios provided by Capital IQ as
of September 17, 2010
MEMC Cost Control
MEMC 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
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DCF Analysis-WACC
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Cost of Debt
◦ 3 Level Rating Float: BB,BBB,A- Float rate from Standard & Poor
◦ Weighted average by comparable analysis
◦ 10 years US note
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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%
DCF Monte Carlo Stimulation
By Crystal Ball
Recommendation
The 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.