Chia-Chia Hu Evangelos Kalogiropoulos Pragnesh Podar Joseph Vaccaro Dec 2, 2008 MEMC Electronic...
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Transcript of Chia-Chia Hu Evangelos Kalogiropoulos Pragnesh Podar Joseph Vaccaro Dec 2, 2008 MEMC Electronic...
Chia-Chia HuEvangelos KalogiropoulosPragnesh PodarJoseph Vaccaro
Dec 2, 2008
MEMC Electronic Materials Inc. (WFR)
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
Source: MEMC 10K
Global Manufacturing
Source:"Bloomberg"
Geographic Revenue
Source:"Bloomberg"
Currency Risk
China 25%Upside
SWOT AnalysisStrengths
International diversification
Holds more than 10% of industry market
share
Contracts at full capacity for the future
Diversified between polysilicon and solar
wafers to reduce cyclicity risk
Weaknesses
Management continues to overestimate
forecasts
Industry requires extensive R&D
Difficult to differentiate product (leads to
price wars)
Capacity utilization could restrain growth
Opportunities
Emerging Markets (China, Taiwan, Korea)
Political Environment
Environmental Concerns
Currency Fluctuations
Commodity price increase
Threats
Economic recession
Current Downward trend in commodity
prices
Cyclical Industry
Volatility of polysilicon prices
Exposure to international competition
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.
Source:"MEMC 10K"
Wafer Industry vs. Semiconductor Industry
•The success of the Wafer Industry is highly correlated to the Semiconductor Industry
Solar Industry
Global Opportunities: Rise in commodity prices
Growth prospects in Asia International Pressure for China to adopt
clean energy(China accounts for 21% of REMC’s revenue)
Opportunities within the U.S. Public Awareness of Environmental
Concerns Political Support
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
Net Sales $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
Non-Operating (Income) Expenses (4.6) 32.2 261.9
Operating Expenses 109.5 130.7 150.6
Minority interests (5.8) (6.4) (3.4)
Net Income $ 249.4 $ 369.3 $ 826.2
Source:"MEMC 10K"
Cash Flow
Balance Sheet - Assets2005 2006 2007 2008Q3
Cash and cash equivalent $ 126.5 $ 527.5 $ 859.3 $ 932.3
Short-term investments 27.1 58.0 457.1 187.3
Accounts Receivables 125.2 199.1 197.9 239.6
Inventories 120.0 80.2 36.4 41.1
Prepaid and other current assets 37.5 34.8 38.8 28.4
Total Current Assets 436.3 899.5 1,589.5 1,428.3
Investments - - - 317.8
PP&E net 494.9 603.5 834.0 976.4
Deferred Taxes, net 165.6 119.5 89.3 89.8
Other Assets 51.3 143.0 374.4 172.0
Total Assets $ 1,148.1 $ 1,765.5 $ 2,887.2 $ 2,984.3
Balance Sheet – Liabilities2005 2006 2007 2008Q3
S/T Debt and current portion of L/T Debt $ 18.3 $ 5.0 $ 5.3 $ 5.7Accounts Payable 105.5 125.4 168.3 141.2Accrued expenses 74.9 67.9 72.7 97.1Deferred Revenue 14.6 5.2 122.0 209.8Taxes Payable 11.6 54.3 75.9 69.3 Total Current Liabilities 224.9 257.8 444.2 523.1Long term Debt, less current portion 34.8 29.4 25.6 24.6Pension and post-employment liabilities 91.0 85.2 60.6 42.0Deferred Revenue - 68.1 81.4 89.7Other L/T Liabilities 41.4 119.5 204.6 190.0Total Liabilities 392.1 560.1 816.4 869.4
Balance Sheet – Equity
2005 2006 2007 2008Q3
Minority Interests 44.6 38.6 35.8 35.9
Common Stock 2.2 2.2 2.3 2.3
Treasury Stock (4.3) (4.3) (115.6) (401.8)
Additional Paid in Capital 191.7 242.5 358.0 431.6
Deferred Stock comp (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)
Total shareholders' equity $ 756.0 $ 1,205.5 $ 2,070.8 $2,115.4
DuPont Analysis
2005 2006 2007Revenues 1,107.4 1,540.6 1,921.8
Net Income(Gain on fair value of warrant)
249.4 -
369.3 (18.9)
826.2 (220.8)
Total Assets 1,148.1 1,765.5 2,887.2
Total Equity 756.0 1,205.5 2,070.8
Net Profit Margin 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%
Current Portfolio
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%
Source:"Bloomberg"
Peer Valuation
Source:"Bloomberg"
Price Ratio Valuation
Source:"Bloomberg"
Peer Valuation
Source:"Bloomberg"
Historic PE Valuation
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
0%
10%
20%
30%
40%
50%
60%
70%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Semiconductor
Solar
Semiconductor sales are set to slump next two years due to the upcoming recession
Slow down in solar industry (2008-2010)1. Low oil price 2. Lack of funds for investments in solar energy 3. Possible relaxation of the environmental obligations until the
recovery of the economy4. Too costly now for the firms to apply the proper equipment
"This model was initially created by David Light"
31
Application of the assumptions
DCF Inputs
Inputs Value CommentsWeight of DebtWeight of EquityCost of debt Cost of equityβRfReturn on the marketTax rateSustainable growth rate(g)WACC
0.72%99.28%5.8%22.72%2.344%12%33%4%22.58%
MV equity & BV debtMV equity & BV debtbloombergCAPMgoogle. finance Yield on 10-year TreasuriesBased on our assumptionsEffective tax rate (10Q³,2008)LT Growth rate of US GDP
DCF model
DCF valuation results
Market value per share at 2-Dec-08 is $12.99. 10% range $16.916-$18.697
Present Value of FCF $4,162.24M
Less: Debt $25.6M
Equity Value $4,136.64
Outstanding shares 232.3M
Value per share $17.807
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?
"Bloomberg"
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