Download MEMC Electronic Materials Inc. (WFR)

MEMC Electronic Materials Inc. (WFR)
Chia-Chia Hu
Evangelos Kalogiropoulos
Pragnesh Podar
Joseph Vaccaro
Dec 2, 2008
Presentation Outline
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Company Overview
Macroeconomic review and industry trends
Historical Financial Analysis
Portfolio Positioning
Peer group comparison
Relative valuation
Financial Projections (DCF Model)
Recommendation
Company Overview
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MEMC Electronic Materials, Inc. is engaged in the
design, manufacture and sale of silicon wafers
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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
Company History
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Founded in 1953
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Pioneer in wafer development & leader in supplying
semiconductor wafers for over 50 years
1995: IPO on NYSE under the ticker WFR
2001: After almost filing for bankruptcy, Private Equity Firm
Texas Pacific Group acquires 72% of the company
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.
What is a wafer?
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MEMC supplies silicon wafers to the
semiconductor and solar power industry
globally
Wafer’s are the foundation on which the
world’s semiconductors and solar cells are
built
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All the processes of a micro device are
conducted on a wafer
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Come in different sizes (1 inch to 12 inches
in diameter) and in different thicknesses
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Wafer sizes have increased device
performance and reduced production costs
50mm, 100 mm, 150mm
and 200 mm wafer
What is a Wafer?
New CEO
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Oct. 30, 2008 MEMC Announces the
Resignation of CEO Nabeel Gareeb
- Marshall Turner appointed as interim CEO
Potential Reasons:
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Management overestimated targets the past 5
quarters
Company faced production problems
Stock severely underperformed the market
Legal Proceedings
Global Manufacturing
Source: MEMC 10K
Geographic Revenue
Source:"Bloomberg"
Currency Risk
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China 25%
Upside
Source:"Bloomberg"
SWOT Analysis
Strengths
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International diversification
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Holds more than 10% of industry market
Weaknesses
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Management continues to overestimate
forecasts
Industry requires extensive R&D
share
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Contracts at full capacity for the future
Difficult
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Diversified between polysilicon and solar
wafers to reduce cyclicity risk
Opportunities
to differentiate product (leads to
price wars)
Capacity
utilization could restrain growth
Threats
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Emerging Markets (China, Taiwan, Korea)
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Economic recession
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Political Environment
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Current Downward trend in commodity
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Environmental Concerns
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Currency Fluctuations
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Cyclical Industry
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Commodity price increase
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Volatility of polysilicon prices
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Exposure to international competition
prices
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)
MEMC's overall success depends on the success of products that use
silicon wafers, specifically semiconductors and solar cells
The need for high degrees of flexibility and innovation in order to
constantly adjust to the rapid pace of change in the market.
Wafer Industry vs. Semiconductor Industry
•The success of the Wafer Industry is highly correlated to the Semiconductor Industry
Source:"MEMC 10K"
Solar Industry
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Opportunities within the U.S.
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Global Opportunities:
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Public Awareness of Environmental
Concerns
Political Support
Rise in commodity prices
Growth prospects in Asia
International Pressure for China to adopt
clean energy
(China accounts for 21% of REMC’s revenue)
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Political Support
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President-Elect Barrack Obama has a green agenda
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Obama has proposed investing $150 billion into
the renewable energy sector over the next 10 years
His proposal also requires that one-tenth of the country's
energy be derived from renewable sources (currently 7%)
The summer spike in oil and commodity prices forced
Americans & Congress to consider the use of
alternative resources
Tax credits, strict adherence to state renewable
portfolio standards and new leadership in
Washington all may play a role in turning the economy
green
Increasing Renewable Portfolio Standards and the
carbon trading system/carbon tax in the U.S. should
favor solar energy
Income Statements
2005
2006
2007
$1,107.4
$1,540.6
$1,921.8
Cost of Goods Sold
740.9
851.6
921.3
Gross Margin
366.5
689.0
1,000.5
Operating Expenses
109.5
130.7
150.6
Operating Income
257.0
558.3
849.9
(4.6)
32.2
261.9
109.5
130.7
150.6
(5.8)
(6.4)
(3.4)
$ 249.4
$ 369.3
$ 826.2
Net Sales
Non-Operating (Income) Expenses
Operating Expenses
Minority interests
Net Income
Cash Flow
Source:"MEMC 10K"
Balance Sheet - Assets
2005
Cash and cash equivalent
126.5 $
527.5 $
27.1
Accounts Receivables
Inventories
Short-term investments
Prepaid and other current assets
Total Current Assets
Investments
$
2006
2007
2008Q3
859.3 $
932.3
58.0
457.1
187.3
125.2
199.1
197.9
239.6
120.0
80.2
36.4
41.1
37.5
34.8
38.8
28.4
436.3
899.5
1,589.5
1,428.3
-
-
-
317.8
PP&E net
494.9
603.5
834.0
976.4
Deferred Taxes, net
165.6
119.5
89.3
89.8
51.3
143.0
374.4
172.0
Other Assets
Total Assets
$ 1,148.1 $ 1,765.5 $ 2,887.2 $ 2,984.3
Balance Sheet – Liabilities
2005
S/T Debt and current portion of
L/T Debt
$
Accounts Payable
Accrued expenses
Deferred Revenue
Taxes Payable
Total Current Liabilities
Long term Debt, less current
portion
Pension and post-employment
liabilities
Deferred Revenue
Other L/T Liabilities
Total Liabilities
2006
2007
2008Q3
18.3 $
105.5
74.9
14.6
11.6
224.9
5.0 $
125.4
67.9
5.2
54.3
257.8
5.3 $
5.7
168.3 141.2
72.7
97.1
122.0 209.8
75.9
69.3
444.2 523.1
34.8
29.4
25.6
24.6
91.0
41.4
392.1
85.2
68.1
119.5
560.1
60.6
81.4
204.6
816.4
42.0
89.7
190.0
869.4
Balance Sheet – Equity
2005
Minority Interests
2006
2007
2008Q3
44.6
38.6
35.8
35.9
2.2
2.2
2.3
2.3
(4.3)
(4.3)
(115.6)
(401.8)
191.7
242.5
358.0
431.6
(0.1)
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Retained Earnings
557.7
933.8
1,760.5
2,077.6
Other Accumulated (Loss)Gain
(35.9)
(7.4)
29.8
(30.2)
756.0 $ 1,205.5 $ 2,070.8
$2,115.4
Common Stock
Treasury Stock
Additional Paid in Capital
Deferred Stock comp
Total shareholders' equity
$
-
-
DuPont Analysis
2005
1,107.4
249.4
-
2006
1,540.6
369.3
2007
1,921.8
826.2
(18.9)
(220.8)
Total Assets
1,148.1
1,765.5
2,887.2
Total Equity
756.0
1,205.5
2,070.8
22.52%
23.97%
42.99%
Asset Turnover
0.964
0.872
0.665
Leverage
1.518
1.464
1.394
ROA
21.72%
20.92%
28.62%
Return on Equity (ROE)
32.99%
30.64%
39.90%
Revenues
Net Income
(Gain on fair value of warrant)
Net Profit Margin
Current Portfolio
AEE
5%
AEO
5%
CPRT
4% DO
4%
FR
3%
JKHY
2%
KMB
8%
CASH
60%
WAG
4%
SRCL
4%
WFR
1%
Current Position
• RCMP purchased 200 shares of WFR on
March 13th, 2008 for $78.15/share.
• Currently WFR is trading at $12.33 as of
December 1, 2008 for an unrealized loss of
$13,164 or 84.22%
Peer Valuation
Source:"Bloomberg"
Price Ratio Valuation
Source:"Bloomberg"
Peer Valuation
Source:"Bloomberg"
Historic PE Valuation
Source:"Bloomberg"
P/E Valuation
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5 year average of 18.4X
Return to 5 year average for C2009
estimate
Assuming Range of 16-20, Gives a potential
price range of $42-$52
Conservatively, at the lower end of the
range, price target is $42
Current assets include over $900 million in
cash and liquid investments.
Long-term contracts
(Solar Cell Manufactures)
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$3-3.5B Tainergy Tech Co. LTD (Taiwan)
$7-8B Conergy (Germany)
3-4B Gintech (Taiwan)
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$7.5-9B
Suntech Power Holdings (China)
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Total estimated worth of contracts $15-18B over the
next 10 years (10K, 2007)
Fixed price (dollar-per watt basis) and take or pay
contracts
Growth assumptions
70%
60%
50%
40%
Semiconductor
30%
Solar
20%
10%
0%
2007
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1.
2.
3.
4.
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Semiconductor sales are set to slump next two years due to
the upcoming recession
Slow down in solar industry (2008-2010)
Low oil price
Lack of funds for investments in solar energy
Possible relaxation of the environmental obligations until the
recovery of the economy
Too costly now for the firms to apply the proper equipment
Application of the assumptions
"This model was initially created
by David Light"
31
DCF Inputs
Inputs
Value
Comments
Weight of Debt
Weight of Equity
Cost of debt
Cost of equity
β
Rf
Return on the market
Tax rate
Sustainable growth rate(g)
WACC
0.72%
99.28%
5.8%
22.72%
2.34
4%
12%
33%
4%
22.58%
MV equity & BV debt
MV equity & BV debt
bloomberg
CAPM
google. finance
Yield on 10-year Treasuries
Based on our assumptions
Effective tax rate (10Q³,2008)
LT Growth rate of US GDP
DCF model
DCF valuation results
Present Value of FCF
Less: Debt
Equity Value
Outstanding shares
Value per share
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$4,162.24M
$25.6M
$4,136.64
232.3M
$17.807
Market value per share at 2-Dec-08 is $12.99.
10% range $16.916-$18.697
Sensitivity Analysis
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Range $15.828-$20.561
Correlation with RCMP Portfolio
WFR
AEE
AEO
CPRT
DO
FR
JKHY
KMB
SRCL
WAG
WFR
1.0000
AEE
0.3330 1.0000
AEO
0.4906 0.4542 1.0000
CPRT
0.3403 0.1978 0.4156 1.0000
DO
0.4421 0.6058 0.4575 0.2975 1.0000
FR
0.4071 0.4152 0.5233 0.3446 0.5153 1.0000
JKHY
0.3566 0.5980 0.5350 0.2841 0.4462 0.6480 1.0000
KMB
0.3354 0.6928 0.4649 0.2692 0.5049 0.5540 0.6652 1.0000
SRCL
0.3279 0.4944 0.3540 0.2060 0.4234 0.4351 0.4408 0.6053 1.0000
WAG
0.2999 0.5408 0.5620 0.3595 0.5074 0.4535 0.4956 0.5404 0.4980 1.0000
Legal proceedings
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On March 31,2008, two lawsuits against MEMC from
a customer concerning violation of agreements by
the side of MEMC.
On Sep. 16,2008, and on Oct. 10,2008 two class
action lawsuits against MEMC and its former CEO
from investors. They allege that during the Class
period, the firm engaged in a scheme to inflate
MEMC’s stock price by failing to certain material
facts regarding MEMC’s operation and performance
violation of Section (10b).
Recommendation
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Buy 400 shares of MEMC Electronic
Materials Inc (WFR) at the current
market price
Our conservative analysis indicates that
the stock is significantly undervalued
Long-term solar contracts worth 15B-18B.
Plenty of cash and no debt are good
features under the current market.
One of the four largest silicon wafer
producers worldwide.
Q&A
Any Questions?
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