The Business Driver
The technological revolution that took off in the ‘90s created a superlative
global market for semiconductors which today is valued in the hundreds of
billions of dollars annually.
Worldwide sales of semiconductors surged to $20.1 billion in July, up 11.5%
year-over-year, according to the Semiconductor Industry Association (SIA). The
trend is positive with sales this year estimated to top $240 billion for the
first time. Growth is found across numerous geographical regions led by yearover-
year sales growth of 17.7% in the U.S. and 13.4% in the Asia Pacific region.
The growth is encouraging given the utter devastation of the semiconductor
industry in 1998 and 1999. The downturn ruined many smaller semiconductor
manufacturers which faced overcapacity issues and price pressures as the demand
for consumer electronics fell. Companies were forced to revamp their operations
in order to survive.
One of the more successful survivors was St. Peters, Missouri-based MEMC
Electronic Materials (WFR). The company has established a strong global
position in the production of silicon wafers and its future looks bright.
The semiconductor industry is undergoing a significant shift as it moves to 300
mm diameter wafers that offer technological advances in the manufacture of
semiconductors. In 2005, volume growth for 300 mm wafers was a staggering 69%,
well above the overall wafer average growth rate of 6%, according to SEMI. MEMC
became the first manufacturer of 300 mm wafers in Taiwan in late August.
Global silicon wafer shipments surged approximately 22% year-overyear in the
second quarter, according to SEMI SMG. Tatsuhiko Shigematsu, SEMI SMG’s chairman
and technology officer of SUMCO Corporation, stated that “Continuing demand for
semiconductors is driving strong growth for silicon wafers.”
MEMC is the largest supplier of silicon wafers to the fast-growing world solar
market which has been increasing approximately 30% per year for the last five
years. This market is projected to grow at a similar rate over the next five
years, according to BP Solar. Given the growing global demand for energy, high
oil prices and the need to find alternative sources, the growth of the solar
energy industry is understandable.
The Fundamentals & Valuation
We favor MEMC for its growth and global leadership in the supply of silicon
wafers. Its valuation is also attractive. The company has clearly turned itself
around and is again profitable after an extended period of losses from 1997 to
2002.
Sales grew 44% annually between 2003 and 2005 and are expected to rise 34% this
year after seeing increases over each of the past five quarters. Earnings surged
102% year-over-year in the second quarter and have steadily increased for the
past four years. The numbers are impressive and we are bullish on the current
strength in the semiconductor industry, which should drive revenues and earnings
going forward.
EBITDA has grown for the past four consecutive years, rising 175% from 2002 to
2005, driven by the corresponding rise in sales and earnings.
Gross margins increased from 20% in 2001 to a record 43% in this year’s second
quarter. The company expects margins to increase by another 2% in the third
quarter.
Cash nearly tripled in the second quarter to $286 million from $101 million in
the year ago quarter. Strong cash flow has allowed the company to aggressively
pay down debt and substantially strengthen the balance sheet.
Along with the strong fundamentals and growth outlook, the valuation is
reasonably attractive. The stock is trading at 17.4 times the consensus Wall
Street 2007 EPS estimate. This is right in the middle of its five-year P/E range
of 7.2 to 28.4, indicating good upside potential.
The Technicals
MEMC could be setting up a double bottom base. The stock peaked earlier in
the year at $48.90 before falling to $30 in June. It then recovered to $39.30
before undercutting the June low when it fell to $26.26 in July. Since that
time, it has gradually recovered and briefly broke out above the mid-point of
the formation before falling back slightly. Thus, the stock looks buyable.
However, a stop should be placed around the $36 area.
Summary
MEMC Electronic Materials has built a powerful operation and is capitalizing
on the turnaround in the semiconductor industry and demand for next-generation
silicon wafers. The superlative growth opportunities in solar power just add
fuel to the fire.
