MEMC Electronic Materials Inc. (WFR) Brandon Lee and David Light March 11, 2008.
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Transcript of MEMC Electronic Materials Inc. (WFR) Brandon Lee and David Light March 11, 2008.
Outline:
What is a Wafer? Industry Outlook Company Overview Competitors Valuation & Portfolio Fit Recommendation
What is a wafer?
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:
What is a Wafer? Industry Outlook Company Overview Competitors Valuation & Portfolio Fit Recommendation
Wafer Industry Outlook 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
Outline:
What is a Wafer? Industry Outlook Company Overview Competitors Valuation & Portfolio Fit Recommendation
Company Overview MEMC produces silicon wafers for the semiconductor and
solar power industry globally
Based in St. Peters, MO
Produces both semiconductor wafers and solar wafers ranging in size from 100mm (4 inches) to 300mm (12 inches)
Strategy: “Continuous improvement of technology, market share, and profits.”
NYSE Ticker: WFR
Expanding into Solar Market
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:
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: Nabeel Gareeb – President, CEO, and member of Board
of Directors Joined MEMC in April 2002 Holds a Masters of Science in Electrical Management and a
Bachelors of Science in Electrical Engineering
John Marren – Chairman of Board of Directors 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
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:
Trailing P/E: 20.83x
Forward P/E: 14.20x
ROA: 22.83%
ROE: 51.62%
Debt to Equity Ratio: .015
Current Ratio: 3.578
Investment Thesis:
Great Visibility
Strong Long-Term Solar Growth
Good Pricing Power (12-18 months)
High barriers to entry in Polysilicon
Very efficient operator
Signed Contracts not yet reflected in stock price
Outline:
What is a Wafer? Industry Outlook Company Overview Competitors Valuation & Portfolio Fit Recommendation
Competitors
Year 1990 2000 2005
Number of Suppliers
MEMCMitsubishiSEHSumitomoWackerKomatsuNippon SteelTISiemensMotorolaSolarexHitachiToshibaLG SiltronSiltecIBMTopsilUnisilAT&TCrystecoKawasaki Steel
MEMCMitsubishiSEHSumitomoWackerKomatsuLG SiltronSiltecToshibaNippon Steel
MEMCShin-Etsu HandotaiSUMCOWackerKomatsuToshibaLG Siltron
Total 21 10 7
Porter’s Five Forces
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.
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 high-quality wafers is a threat to take share and increase rivalry.
Rivalry: Fewer and fewer competitors in recent years.
Outline:
What is a Wafer? Industry Outlook Company Overview Competitors Valuation & Portfolio Fit Recommendation
Revenue Projection
Year Semi Revenue Growth Signed Solar Rev Add'l Solar Rev Total Solar Solar Growth Total Rev Total Rev Growth2006 1,540.6 0 0 1,540.62007 1,821.8 18.3% 0 100 100 1,921.8 24.7%2008 2,004.0 10.0% 400.0 0.0 400 300.0% 2,404.0 25.1%2009 2,204.4 10.0% 520.4 139.6 660.0 65.0% 2,864.4 19.2%2010 2,424.8 10.0% 677.2 345.8 1,023.0 55.0% 3,447.8 20.4%2011 2,667.3 10.0% 881.1 551.1 1,432.2 40.0% 4,099.5 18.9%2012 2,934.0 10.0% 1,146.4 858.7 2,005.1 40.0% 4,939.1 20.5%2013 3,227.4 10.0% 1,491.6 1,215.3 2,706.9 35.0% 5,934.3 20.1%2014 3,550.2 10.0% 1,940.7 1,578.2 3,518.9 30.0% 7,069.1 19.1%2015 3,905.2 10.0% 2,525.1 1,873.5 4,398.6 25.0% 8,303.8 17.5%2016 4,295.7 10.0% 3,285.5 1,992.9 5,278.4 20.0% 9,574.1 15.3%2017 4,725.3 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
WACC: 13.95% Long-term growth: 5% Beta: 1.66
Fiscal Year ended 12/312007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E
COGS % of revenue 47.9% 45.0% 44.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0%SG&A % of revenue 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6%
PP&E % Growth 34.1% 35.0% 31.0% 26.0% 15.0% 15.0% 15.0% 15.0% 12.0% 10.0% 10.0%PP&E % Sales 63.0% 68.0% 74.8% 78.3% 75.7% 72.3% 69.2% 66.8% 63.7% 60.7% 57.8%
DCF Valuation
Current Price: 71.93
DCF Value: 87.10
Intrinsic Value: 78.40-95.82
Estimated Total Return: 21%
DCF Assumptions
Sensitivity AnalysisWACC
87.11 10.00% 11.00% 12.00% 13.00% 13.95% 15.00% 16.00% 17.00% 18.00%2.00% 124.21 106.60 92.74 81.58 72.88 64.83 58.42 52.97 48.282.50% 130.01 110.80 95.85 83.94 74.73 66.26 59.56 53.89 49.033.00% 136.64 115.51 99.31 86.54 76.75 67.82 60.79 54.87 49.833.50% 144.29 120.86 103.18 89.42 78.97 69.51 62.12 55.93 50.68
Growth 4.00% 153.21 126.97 107.53 92.62 81.41 71.35 63.56 57.07 51.594.50% 163.76 134.02 112.47 96.19 84.10 73.37 65.12 58.30 52.575.00% 176.41 142.25 118.10 100.20 87.10 75.59 66.83 59.63 53.625.50% 191.88 151.97 124.61 104.76 90.45 78.05 68.70 61.08 54.766.00% 211.21 163.63 132.19 109.96 94.23 80.78 70.75 62.65 55.99
Portfolio Fit
RCMP Portfolio
CASH43%
AEE5%
AEO7%
CPRT7%
DFS1%
DO3%
FR8%
JKHY3%
KMB5%
MVSN1%
SRCL6% SRZ
2%
WAG5%
WFR4%
CASH AEE AEO CPRT DFS DO FR JKHY KMB MVSN SRCL SRZ WAG WFR
Outline:
What is a Wafer? Industry Outlook Company Overview Competitors Valuation & Portfolio Fit Recommendation