MEMC Electronics (NYSE:WFR) is among the world’s largest producers of silicon wafers for the semiconductor and solar industries. In its more than 30 years of existence, MEMC has grown its business to a market cap of $3.7 billion. But do not be fooled, this is a market cap that has been drastically reduced in recent months. Just this past April WFR hit its 52-week high at $86.80. Since then, the stock has been in free fall trading down to its current level of $16.53. November saw a low of $10 which appears to be its bottom for the moment as the stock has stabilized trading in the teens. But are these prices justified?
The solar market has all but dried up in this weak economy. Many would agree that this sector was highly over bought and was a bubble that needed to burst, as it did. Yet, solar is only the minority share of MEMC’s profits. Semiconductors represent the lion’s share of the company’s business. However, the semis are in their own slump, as evident by the several downward revisions by such companies as giant Intel (Nasdaq: INTC). They recently informed the street that they are going to miss their already lowered revenue targets down 23% year over year. We know MEMC is going to have a rough Q4 and I am sure Q1 and Q2 of 2009 will not be much better. But just how bad can earning get? MEMC currently trades at a PE ratio of 5.5. Being a growth stock, MEMC’s PE conservatively trades in the 20’s historically. This PE prices in a 75% decline in the company’s earnings.
While revenues are certainly going to be down, it is highly unlikely to decline by this amount. With Obama ready to take office, there are rumblings that he will favor alternative energies and especially solar. It would certainly be difficult imagine a sustained decline of 75% in solar demand. Furthermore, MEMC boasts the lowest Cost of Production and the highest Return on Equity of any of its peers. In a tight market, this favors MEMC. As prices decline due to a lack of demand, peers that are less cost efficient can easily get priced out of the market as margins go to zero or even negative. MEMC is in a good position to snap up market share. Furthermore, WFR is a pioneer in the business which means they have honed their highly intellectual production processes to not only be more efficient, but also has developed advanced products that their peers simply do not make. This will be critical for the further growth of their semiconductor business which will very likely not decline by the previously mentioned 75%.
There are many unknowns in MEMC’s future that should make an investor balk. However, the market is treating the company as if they were a one trick pony in the solar space. Unfortunately, WFR does not pay a dividend since they are highly geared towards growth. Thus, there is no “getting paid to wait” strategy to employ. If it takes MEMC another year or two to turn around, you will have been sitting on dead money for that time. Yet, the valuations and fundamentals on this best-in-breed stock are too compelling to do nothing. I am taking an approach that builds my position in three separate purchases over time. I will be looking to take a third of my overall desired position in the next few weeks. As Obama takes office and more is know about the economy, I will add to that position with the other two purchases. Even if I am buying my later positions at a higher price, it will come with the knowledge that MEMC’s business will more likely be improving; thus removing the amount of risk from the overall position.
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