|
Published: March 18, 2010
You can't blame all of the vast stock
sell-offs in 2008 and early 2009 on the lousy economy.
Sometimes, share prices plunged simply due to management
ineptitude. MEMC Electronic Materials (NYSE: WFR) was a
perennially respected leading supplier of those big disks --
known as wafers -- for roughly four decades. And investors had
no problem paying $60, $70 or even $80 for its shares.
But management simply dropped the ball. They sought to replicate
their dominant position in semiconductors in the burgeoning
world of solar power. After all, solar panels are made from
fairly similar wafer-style technology. Trouble is, MEMC's
management neglected its crown jewel (semiconductors) and paid
too much attention to the solar biz. The net result: rivals
stole major
market share, and MEMC quickly moved from industry leader to
industry laggard. Shares plunged from $80 two years ago to as
low as $10 and still trade for less than $15.
Behind the scenes, MEMC is getting back on track, thanks to new
management. In recent quarters, the semiconductor segment has
received the attention it needed, and the company is now
re-taking market share that was lost to rivals. An increase in
overall industry demand and firming prices are setting the stage
for a nice recovery in the business, which should see a revenue
boost of +60% to +70% this year, according to management.
Equally important, profit margins are now quickly rebounding. In
the most recent quarter, gross margins rose to about 15% and
should move back into the 20s in the next few quarters, thanks
to rising factory utilization rates and recent price increases.
(It helps that privately-held Asian rivals Shin-Etsu and
Siltronic are also raising prices, signaling that the days of
price wars for wafers are now over). Profits should build in
this segment throughout this year as a result. Analysts think
the wafer division could be worth as much as $11 a share --
still just a fraction of what the business was worth when it
held higher market share and had far better margins back in
2007.
MEMC also carries about $2.50 a share in net cash on its
balance sheet. This brings us to a total estimated value of
about $13.50, close to current share prices. This means the
solar power segment of MEMC is being assigned virtually no value
by investors. Blame it on investor myopia. MEMC has been
aggressively investing in this business, including a December,
2009 purchase of SunEdison, one of the world's largest builders
and operators of solar power plants, for 300 million dollars.
To be sure, MEMC has morphed its
business model in this segment -- from a wafer supplier to a
plant operator. This has left analysts scratching their heads in
search of an appropriate valuation. As this segment builds out,
it will entail a range of upfront costs, which obscures the view
of potential profits. But as the long-term view comes into
focus, this division could throw off between 50 cents and a
dollar in annual profits per share.
MEMC recently got a boost when it was awarded, by the government
of Italy, its largest ever contract for a solar plant
installation. That contract should enable MEMC to handily exceed
its 2010 goal of 100 Megawatts (MW) of new plant construction.
Management expects to make additional announcements during the
next few months, which should help beat back detractors
expecting a severe slowdown in the solar field.
Looking ahead to next year, the company thinks it can sign
contracts equating to 200 MW of power generation. That may seem
a tall order, but most analysts think global demand for solar
power in 2011 will exceed 10 Gigawatts (or 10,000 MW).
So, what's the solar business worth? At a minimum, MEMC has
invested more than $700 million -- or about $3 a share. But if
it can generate $0.50 to $1 a share in profit, then the segment
could be worth closer to $5 or $10 a share. Tack on the value of
the semiconductor business and the company's cash position, and
shares of MEMC could handily move back north of $20. That's
still a far cry from the $80 fetched in 2007, but still
represents an upside of about +50% form current levels.
-- David Sterman
Contributor
StreetAuthority |
