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Minyan Mailbag: Evaluating MEMC Electronic Materials


WFR is an animal all its own and it can't really be compared with providers of semiconductor process tools.


Editor's Note: The following is a discussion started by Minyan Kevin. See below for responses by Professor Katz and Professor Udall.

Professor Katz,

Todd mentioned semi-caps trading punk -- how 'bout MEMC Electronic Materials (WFR) +14%? Last night they announced another major solar wafer contract to support their business model of semi and solar production, in effect isolating them from downturns in semi's and making them very attractive with oil above $85.

Do you think the other semi-caps are trading down because of their perceived impediment to gaining market share in an industry where the top five players all hold over 10% market share, with WFR seemingly best-positioned?

-Minyan Kevin


Speaking freely, I think we are confusing some issues. WFR provides bulk silicon from which semiconductors wafers are derived. Now, the bulk of solar technology revolves around panels that are also created with silicon. It is also a lower grade silicon so basically everything that WFR would have previously deemed useless is now very valuable as solar proliferates and pricing is getting driven higher.

Indeed, the higher energy prices go, the better the pricing environment gets for WFR. This makes WFR an animal all of its own and makes comparing it to providers of semiconductor process tools a facile analogy.

I pointed out about a week ago that many were looking at the pace of semiconductor capacity build out and concluding that equipment sales and consequently growth rates could not continue at the pace that we've seen for the past three years. So, many were trying to get short and those shorts were ill timed. Now we are finally seeing equipment order purchases are slowing as evidenced by substantial drops in the book to bill ratios, guidance by the capital equipment companies… and it's been exacerbated by what I believe is conservative guidance by the chip companies.


Professor Katz,

In the vein of facile analogies, any insight into the multiple that should be applied to WFR? I've seen research that using a slight premium to the semi-cap space (19x) because of the solar franchise, tags a $76 target. It seems WFR is beginning to be revalued today, and I'm wondering how far it can go? I see roughly 70% of EPS semi, and 305 solar. Open-ended question, just wanted to share my thinking...

-Minyan Kevin


I do agree it deserves a premium relative to the space simply because they operate on higher gross margins and continue to be a greater growth story than the rest of the space. I would caution that the premium seems to be firmly in place.

Most of the capex guys have experienced some nice operating margin expansion this year going from an average of about 15.5% to about 23% vs. WFR which has experienced operating margin increase from 24% to 36%. Now, with most of the capex guys trading at P/Es of between 11-15x (ASML, LRCX, KLAC, AMAT, VSEA) it does make WFR, at 28x seem pretty baked into the cake at my opinion. That is a loose framework for how I would approach a valuation comparison.

Unfortunately, this is such an over-covered space that it often trades more on psychology around capacity build out cycles than it does on valuation. Or at least that's true until down cycles wash out the space. Given that we are seemingly at the end of what has been a very strong business cycle for the space, I think you have to consider the impact the psychology could have on valuations going forward when doing your work. Hope this helps.



I think the issue is pretty simple. The market will always chose favorites in certain sectors. Adam provides a key point in that the stocks are not really in the same group even though the media tends to lump them together. However, the market has embraced WFR and forgiven it the occassional rough patch. I did like WFR up to the high $40 to mid $50's. At these levels, I won't touch it for a core long and am in fact, looking at shorts on names like First Solar (FSLR) and SunPower (SPWR) and other names so this could be thrown in with that group.

The semi-caps have suffered for many years of their capacity glut post 2000 period. I am more sanguine on the high quality semi-cap names. I, like Adam, think that many of these companies may be offering guidance that is too conservative. I would not be surprised to see a few of them outperform their issued guidance and possibly by a wide margin. As equipment orders never get good until the chip makers themselves start to feel constrained. I have a sense that constraints could develop, though none are expected currently.

Lastly, AMAT does have a division/product that specializes in the solar fab space. So AMAT could provide a back door way to play continued growth in solar wafer production, while not paying a nosebleed price of the pure plays in that space.

-Sean U.

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