MEMC Electronic Materials Inc.
(WFR)
Brandon Lee and David Light
March 11, 2008
Outline:
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What is a Wafer?
Industry Outlook
Company Overview
Competitors
Valuation & Portfolio Fit
Recommendation
What is a wafer?
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A thin slice of semiconductor material
used to make microchips and other
micro devices
All the processes of a micro device
are conducted on a wafer
Come in different sizes (1 inch to 12
inches in diameter) and in different
thicknesses
Wafer sizes have increased device
performance and reduced production
costs
A silicon wafer
Outline:
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What is a Wafer?
Industry Outlook
Company Overview
Competitors
Valuation & Portfolio Fit
Recommendation
Wafer Industry Outlook
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The introduction of electronics and computer technology
into our daily lives is growing at an exponential rate.
One of the few markets that can improve device
performance while sustaining steady revenue growth and
reducing production costs.
There is a trend towards developing larger wafers
(200mm and 300mm)
Over the past 10 years, the wafer industry has
consolidated and only four companies have 10% or more
of the market share
Highly correlated with semiconductor industry
Wafer Industry vs. Semiconductor Industry
Wafer Market Size and Growth
Outline:
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What is a Wafer?
Industry Outlook
Company Overview
Competitors
Valuation & Portfolio Fit
Recommendation
Company Overview
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MEMC produces silicon wafers for the semiconductor and
solar power industry globally
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Based in St. Peters, MO
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Produces both semiconductor wafers and solar wafers
ranging in size from 100mm (4 inches) to 300mm (12
inches)
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Strategy: “Continuous improvement of technology,
market share, and profits.”
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NYSE Ticker: WFR
Expanding into Solar Market
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Began producing solar wafers in 2007
Currently outsources production
 Bringing production in house in 2009
 Improved margins
Has contracts signed worth $15-18BN over the next 10
years
Has current capacity for one more contract over that time
worth another $2-3BN
Solar represents a 30% annual growth market
Company History:
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Founded in 1953
Pioneer in wafer development & leader in supplying
semiconductor wafers for over 50 years
1995: IPO on NYSE under the ticker WFR
2006: Announced the signing of $7-9 billion in contracts
to deliver solar wafers (an $18 billion market at the time)
2008: One of four wafer companies with 10% or more of
the market share.
Management Team:
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Nabeel Gareeb – President, CEO, and member of Board
of Directors
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John Marren – Chairman of Board of Directors
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Joined MEMC in April 2002
Holds a Masters of Science in Electrical Management and a
Bachelors of Science in Electrical Engineering
Has been with MEMC since November 2001
Partner of Texas Pacific Group
Board of Directors of Conexant Systems, Inc. and ON
Semiconductor Corporation
Dr. Shaker Sadasivam – Senior VP, Research and
Development
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Has been with MEMC since 1993, serving many different roles
Holds a Doctorate’s and Masters in Chemical Engineering and
a Masters in Business Administration
Statistics:
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Trailing P/E: 20.83x
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Forward P/E: 14.20x
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ROA: 22.83%
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ROE: 51.62%
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Debt to Equity Ratio: .015
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Current Ratio: 3.578
Investment Thesis:
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Great Visibility
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Strong Long-Term Solar Growth
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Good Pricing Power (12-18 months)
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High barriers to entry in Polysilicon
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Very efficient operator
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Signed Contracts not yet reflected in stock price
Outline:
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What is a Wafer?
Industry Outlook
Company Overview
Competitors
Valuation & Portfolio Fit
Recommendation
Competitors
Year
1990
2000
2005
Number of
Suppliers
MEMC
Mitsubishi
SEH
Sumitomo
Wacker
Komatsu
Nippon Steel
TI
Siemens
Motorola
Solarex
Hitachi
Toshiba
LG Siltron
Siltec
IBM
Topsil
Unisil
AT&T
Crysteco
Kawasaki Steel
MEMC
Mitsubishi
SEH
Sumitomo
Wacker
Komatsu
LG Siltron
Siltec
Toshiba
Nippon Steel
MEMC
Shin-Etsu Handotai
SUMCO
Wacker
Komatsu
Toshiba
LG Siltron
Total
21
10
7
Porter’s Five Forces
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Barriers to Entry: Highly specialized and technical industry with
very few competitors and high barriers to entry. 3 years to build a
polysilicon plant, 18 months to build a wafer plant.
Bargaining Power of Buyers: Low. There used to be a lot of
wafer companies, but consolidation has led to fewer competitors.
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Only four companies with 10% or more of market share.
Bargaining Power of Suppliers: Low. MEMC manufactures
their own polysilicon, the major raw material used in making
wafers.
Threat of Substitutes: Somewhat high. Anyone making highquality wafers is a threat to take share and increase rivalry.
Rivalry: Fewer and fewer competitors in recent years.
Outline:
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What is a Wafer?
Industry Outlook
Company Overview
Competitors
Valuation & Portfolio Fit
Recommendation
WFR vs. S&P 500 (1 Year)
WFR vs. S&P 500 vs.
S&P Semiconductors Index (5 Year)
Source: 2007 Annual Report
Revenue Projection
Year Semi Revenue
2006
1,540.6
2007
1,821.8
2008
2,004.0
2009
2,204.4
2010
2,424.8
2011
2,667.3
2012
2,934.0
2013
3,227.4
2014
3,550.2
2015
3,905.2
2016
4,295.7
2017
4,725.3
Growth Signed Solar Rev Add'l Solar Rev Total Solar Solar Growth Total Rev Total Rev Growth
0
0
1,540.6
18.3%
0
100
100
1,921.8
24.7%
10.0%
400.0
0.0
400
300.0%
2,404.0
25.1%
10.0%
520.4
139.6
660.0
65.0%
2,864.4
19.2%
10.0%
677.2
345.8
1,023.0
55.0%
3,447.8
20.4%
10.0%
881.1
551.1
1,432.2
40.0%
4,099.5
18.9%
10.0%
1,146.4
858.7
2,005.1
40.0%
4,939.1
20.5%
10.0%
1,491.6
1,215.3
2,706.9
35.0%
5,934.3
20.1%
10.0%
1,940.7
1,578.2
3,518.9
30.0%
7,069.1
19.1%
10.0%
2,525.1
1,873.5
4,398.6
25.0%
8,303.8
17.5%
10.0%
3,285.5
1,992.9
5,278.4
20.0%
9,574.1
15.3%
10.0%
4,274.8
2,059.2
6,334.0
20.0%
11,059.3
15.5%
*Strong Growth 2008-10 due to ramp up for solar
*These Growth Rates (Column T) are now used in revenue forecasts
DCF Assumptions
Fiscal Year ended 12/31
2007
2008E
COGS % of revenue
47.9%
45.0%
SG&A % of revenue
1.6%
1.6%
2009E
44.0%
1.6%
2010E
42.0%
1.6%
2011E
42.0%
1.6%
2012E
42.0%
1.6%
2013E
42.0%
1.6%
2014E
42.0%
1.6%
2015E
42.0%
1.6%
2016E
42.0%
1.6%
2017E
42.0%
1.6%
PP&E % Growth
PP&E % Sales
31.0%
74.8%
26.0%
78.3%
15.0%
75.7%
15.0%
72.3%
15.0%
69.2%
15.0%
66.8%
12.0%
63.7%
10.0%
60.7%
10.0%
57.8%
34.1%
63.0%
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35.0%
68.0%
WACC: 13.95%
Long-term growth: 5%
Beta: 1.66
DCF Valuation
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Current Price: 71.93
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DCF Value: 87.10
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Intrinsic Value: 78.40-95.82
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Estimated Total Return: 21%
DCF Assumptions
Sensitivity Analysis
Growth
87.11
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
10.00%
124.21
130.01
136.64
144.29
153.21
163.76
176.41
191.88
211.21
11.00%
106.60
110.80
115.51
120.86
126.97
134.02
142.25
151.97
163.63
12.00%
92.74
95.85
99.31
103.18
107.53
112.47
118.10
124.61
132.19
13.00%
81.58
83.94
86.54
89.42
92.62
96.19
100.20
104.76
109.96
WACC
13.95%
72.88
74.73
76.75
78.97
81.41
84.10
87.10
90.45
94.23
15.00%
64.83
66.26
67.82
69.51
71.35
73.37
75.59
78.05
80.78
16.00%
58.42
59.56
60.79
62.12
63.56
65.12
66.83
68.70
70.75
17.00%
52.97
53.89
54.87
55.93
57.07
58.30
59.63
61.08
62.65
18.00%
48.28
49.03
49.83
50.68
51.59
52.57
53.62
54.76
55.99
Portfolio Fit
RCMP Portfolio
SRCL
6%
SRZ
2%
MVSN
1%
WAG
5%
WFR
4%
CASH
43%
KMB
5%
JKHY
3%
FR
8%
DO
3%
CPRT
7%
DFS
1%
CASH
AEE
AEO
CPRT
AEE
5%
AEO
7%
DFS
DO
FR
JKHY
KMB
MVSN
SRCL
SRZ
WAG
WFR
Outline:

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What is a Wafer?
Industry Outlook
Company Overview
Competitors
Valuation & Portfolio Fit
Recommendation
Recommendation:
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BUY 200 shares of WFR at market price
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Approximate cost: $14,822.00
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Increases total number of holdings to 13.
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WFR will represent approximately 4.12%
upon purchase
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WFR will expose the RCMP portfolio to the
semiconductor industry and alternative
energy