MEMC Electronic Materials
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Transcript of MEMC Electronic Materials
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MEMC Electronic Materials
Michael BellisarioZach Chen
Suyang Sean HongVignesh Murali
Ron Yang
Tuesday, April 13, 2010Ticker: WFR (NYSE)
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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
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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
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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
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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)
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Geographic Presence
Source: 2009 Annual Report
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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
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Historical Demand Semiconductor
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Forecasted Demand
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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
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Sun Edison Acquisition• Business segment realignmentSolar Materials Materials BusinessSemiconductor 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
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Sun Edison Acquisition• Global Solar Capacity
Sun Edison
• Expandable Market
ROWJapanChinaIndia
U.S.
FranceItalySpain
Germany
Canada
Source: 2010 Capital Markets Day Presentation
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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)
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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
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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
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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
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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
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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
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Porter’s Five Forces
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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
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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
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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
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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)
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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
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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
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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
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Multiples ValuationCompany P/S P/B EV/EBITDA
Forward P/E
Semi Shin-Etsu Co. 1.94 1.71 6.32 29.38Semi SUMCO 2.25 1.86 - -Solar SolarWorld AG 1.18 1.45 7.11 10.2Solar Trina Solar 2.00 2.80 76.00 13.8Solar ReneSola 0.70 0.98 - 9.89Solar LDK Solar 0.78 1.39 - 10.89SunEd SunPower 1.16 1.25 9.60 9.02 SunEd First Solar 4.81 3.74 12.00 17.26
Valuation Method WeightP/S 40%P/B 40%
EV/EBITDA 0%Forward P/E 20%
Multiples Valuation $13.21
Multiples Range Low High
$6.54 $28.58
MEMC Electronics
3.07 1.65 8.98 20.64
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Historical Performance
TPG bailout, avoided
bankruptcy
Massive cost cutting,
profitable by FY2003
Solar wafer
introduction
CEO resigns
Source: Yahoo! Finance
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Recent Performance
Stock bottoms
Market bottoms
Positive 2010 guidance, Sun Edison clarity
Q2 results, sales at low end of guidance
New CFO
Q3 results, Sun Edison announcement
New CEO
Source: Yahoo! Finance
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Profitability
Proliferate market resulted in oversupply
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Profitability
Management failed to control SG&A when sales fell
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Liquidity
Hold large amount of cash/buffered the impact of ST debt
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Efficiency
Inventory is highly correlated to sales
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Efficiency
Declining operating efficiency
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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%
ROE 51.1% 35.1% 31.6% 40.6% 18.6% -3.1%
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DuPont Analysis
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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
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Revenue Assumptions
Materials BusinessSolar Energy (SunEdison)
MEMC Total
Semiconductor Materials Solar MaterialsMaterials
Business Total
Growth Sales% of Total Growth Sales
% of Total
Growth Sales
Growth
Sales
% of Total
Growth Sales
2007 1,216
.9 63.3
% 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
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Discount Rate Calculation
Goalpost cost of equity = 15.5%
Risk-Free Rate4.00
% 5.00%Market Risk Premium
5.00% 6.00%
Beta 1.75 1.75
CAPM12.75
%15.50
%k(e) WFR 15.50%
Market Return (5-yr) 0.69%WFR ROE (5-yr) 7.24%CAPM Expected -2.17%WFR Alpha 9.41%
k(d) WFR 6.00%% Equity 89.6%% Debt 10.4%Tax Rate 25%
WACC14.36
%Adjusted Discount Rate = 15%
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DCF Analysis• Current stock price: $15.96• 15% discount rate• 4% growth rate• DCF price: $12.40 Sensitivity Analysis Discount Rate 12.40 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0%
Growth Rate
2.5% 16.61 14.39 12.58 11.07 9.80 8.72 7.793.0% 17.44 15.03 13.08 11.48 10.13 8.99 8.023.5% 18.36 15.74 13.64 11.92 10.49 9.28 8.264.0% 19.41 16.53 14.25 12.40 10.88 9.60 8.524.5% 20.59 17.41 14.92 12.93 11.30 9.94 8.805.0% 21.94 18.40 15.67 13.51 11.76 10.31 9.105.5% 23.50 19.53 16.51 14.15 12.26 10.71 9.42
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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