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MEMC Electronic Materials Inc. (WFR) Chia-Chia Hu Evangelos Kalogiropoulos Pragnesh Podar Joseph Vaccaro Dec 2, 2008 Presentation Outline Company Overview Macroeconomic review and industry trends Historical Financial Analysis Portfolio Positioning Peer group comparison Relative valuation Financial Projections (DCF Model) Recommendation Company Overview MEMC Electronic Materials, Inc. is engaged in the design, manufacture and sale of silicon wafers 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 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 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? 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 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 50mm, 100 mm, 150mm and 200 mm wafer What is a Wafer? New CEO Oct. 30, 2008 MEMC Announces the Resignation of CEO Nabeel Gareeb - Marshall Turner appointed as interim CEO Potential Reasons: 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 China 25% Upside Source:"Bloomberg" SWOT Analysis Strengths International diversification Holds more than 10% of industry market Weaknesses Management continues to overestimate forecasts Industry requires extensive R&D share Contracts at full capacity for the future Difficult Diversified between polysilicon and solar wafers to reduce cyclicity risk Opportunities to differentiate product (leads to price wars) Capacity utilization could restrain growth Threats Emerging Markets (China, Taiwan, Korea) Economic recession Political Environment Current Downward trend in commodity Environmental Concerns Currency Fluctuations Cyclical Industry Commodity price increase Volatility of polysilicon prices Exposure to international competition prices 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) 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 Opportunities within the U.S. Global Opportunities: 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) Political Support President-Elect Barrack Obama has a green agenda 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) - 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 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) $3-3.5B Tainergy Tech Co. LTD (Taiwan) $7-8B Conergy (Germany) 3-4B Gintech (Taiwan) $7.5-9B Suntech Power Holdings (China) 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 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 $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 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 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 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? Renewable Energy & Oil -- Alternative Energy Index -- Oil "Bloomberg" 1-year chart 10 year chart World Semiconductor Trading Statistics