MEMC Electronic Materials

Michael BellisarioZach Chen

Suyang Sean HongVignesh Murali

Ron Yang

Tuesday, April 13, 2010Ticker: WFR (NYSE)

MEMC Electronic Materials

• Purchase History• Business Overview• Industry Analysis• SWOT Analysis & Porter’s Five Forces• Competitor Analysis• Multiples Valuation• Historical & Recent Stock Performance• Financial Statements Analysis• Management Assessment• DCF Valuation & Recommendation

Purchase History• March 2008 – Bought 200 shares @ $78.15• December 2008 – Bought 400 shares @ $14.43• Cost basis - $35.67/share

• April 9, 2010 Closing Price - $15.96• Market value of holding (600 shares) = $9,576• 2.9% of total portfolio, 8.5% ex-cash (not

including BGC)• Unrealized loss of 55.3% or $11,826

• Recommendation = HOLD

Business Overview• MEMC designs, manufactures, and sells silicon

wafers•Semiconductor wafers and solar wafers•Solar “projects” through Sun Edison

• Based in St. Peters, MO

• One of four wafer companies with 10%+ market share

• NYSE Ticker: WFR

What is a wafer?• Wafers 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

• Increased wafer sizes have increased device performance and reduced production costs

50mm, 100mm, 150mm & 200 mm wafers (top)45nm (bottom)

Geographic Presence

Source: 2009 Annual Report

Business Overview• Semiconductor Materials ($7B market size)

• Continuous technological development and product innovation

• Solar Materials ($10B market size)• Intense cost pressures and competition from

thin-film technologies• Solar Energy ($39B market size)

• Very competitive in terms of pricing and continuing evolution of technologies

Historical Demand Semiconductor

Forecasted Demand

Sun Edison Acquisition• November 20, 2009• Vertical integration strategy – closer to end

customer• North America’s largest solar energy service

provider• Development of solar power plants and

commercialization of solar energy• Solar project “manager”

• Construction & selling solar projects• Selling electricity• Ongoing maintenance & solar services

Sun Edison Acquisition• Business segment realignmentSolar Materials Materials BusinessSemiconductor Materials Solar Energy (Sun

Edison)

• Sun Edison will retain name, become subsidiary of MEMC

• $314.6 million purchase price• Negative initial reaction by market• $285 million of goodwill, $300+ million of debt

• Increased customer base• Kohl’s, Staples, City of San Diego, Xcel Energy

Sun Edison Acquisition• Global Solar Capacity

Sun Edison

• Expandable Market

ROWJapanChinaIndia

U.S.

FranceItalySpain

Germany

Canada

Source: 2010 Capital Markets Day Presentation

Sun Edison Acquisition• 100+ Mws under management• 3 billion kw/hrs contracted for 20 years• 2009 accomplishments: 40 Mw, 135 systems

installed• 2010 goals: >100 Mws installed, 1 Gw backlog

• MEMC’s growth going forward/highly uncertain though

• 20-yr contract, price pegged at or below cost of grid power

• Economically sensible only when there are substantial subsidies (Spain)

Sun Edison Acquisition• Customer Success Story – Kohl’s

• Largest rooftop solar rollout in U.S. history• System Type: Roof-mounted solar panels• System Size: 25 megawatts across 65 sites in

California• Annual Savings: Reduced energy operating

expenses• Capital outlay for Kohl’s: $0• System will provide 20-30% of each store’s power

SWOT Analysis - Strengths

• 50 years in the wafer industry

• Wide range of products

• Diversified geographic presence• Sales in U.S. , Taiwan, China, Europe

• Strategic long term contracts• 10-yr contracts worth about $10-12.5 billion

• Strong R&D• $40 million in 2009

SWOT Analysis - Weaknesses

• Operating disruptions• Equipment failure in August 2009 at Pasadena,

Texas facility decreased sales and gross margins

• Low operating efficiency• Declining asset turnover

• Reduced financial flexibility• Significant capital diverted to Sun Edison

business

SWOT Analysis - Opportunities

• Long-term growth in renewable energy• Potential increase in government support and

investor demand as oil/commodity prices rise

• Rebound in semiconductor shipments worldwide

• Solar projects become more attractive as costs come down due to technology improvements

SWOT Analysis - Threats

• Government subsidies• Sun Edison would not be profitable without

favorable government subsidies

• Concentration of the buyers• One customer in Materials Business accounted

for 23% of 2009 revenues• Top three customers accounted for 39% of

2009 total revenues

Porter’s Five Forces

Competitors• Based on the following criteria:

• Initial list of competitors provided by MEMC’s 10-k

• Biggest competitors from each segment (solar wafers, semiconductor wafers, and solar projects)

• Attempted to match revenues and markets

Trina Solar• Integrated solar-power products manufacturer• Based in China with customers throughout the

world• Major competitor of MEMC in Germany, Spain,

Italy, and the United States• Currently produces more solar energy

(megawatts) than MEMC

Shin-Etsu• Japanese-based chemical manufacturing

company• Wafer manufacturing = 40% of revenues, 41% of

total assets• Wafer sales 3x greater than MEMC’s wafer sales• Net income fell 60% last year

SUMCO• Japanese-based manufacturing company mainly

engaged in silicon production• Also produces silicon wafers for solar batteries• Similar in size and revenues to WFR• Revenues decreased 44% due to lower demand

in North America and Japan (~85% of total revenue)

SolarWorld AG• German-based manufacturer of silicon solar

wafers, solar cells, and solar modules• Competes with WFR in the solar cells and panels

segment• Top industry participant• 38% drop in net income year-over-year

Sun Edison Competitors• First Solar

• Manufacturer of solar modules and solar power systems based in Tempe, AZ

• Acquired OptiSolar to increase exposure to solar power project development

• Revenues of $2.7B (66% increase year-over-year)

• SunPower• Producer of high performance solar electric

power technologies (solar panels & invertors)• Acquired Tilt Solar in 2009• Revenues of $977M

Multiples Valuation• More weight toward P/B and P/S as they were

more stable than EV/EBITDA

• Out of the eight competitors, most had negative earnings history; therefore we used forward P/E

Multiples ValuationCompany P/S P/B EV/EBITDA

Forward P/E

Semi Shin-Etsu Co. 1.94 1.71 6.32 29.38Semi SUMCO 2.25 1.86 - -Solar SolarWorld AG 1.18 1.45 7.11 10.2Solar Trina Solar 2.00 2.80 76.00 13.8Solar ReneSola 0.70 0.98 - 9.89Solar LDK Solar 0.78 1.39 - 10.89SunEd SunPower 1.16 1.25 9.60 9.02 SunEd First Solar 4.81 3.74 12.00 17.26

Valuation Method WeightP/S 40%P/B 40%

EV/EBITDA 0%Forward P/E 20%

Multiples Valuation $13.21

Multiples Range Low High

$6.54 $28.58

MEMC Electronics

3.07 1.65 8.98 20.64

Historical Performance

TPG bailout, avoided

bankruptcy

Massive cost cutting,

profitable by FY2003

Solar wafer

introduction

CEO resigns

Source: Yahoo! Finance

Recent Performance

Stock bottoms

Market bottoms

Positive 2010 guidance, Sun Edison clarity

Q2 results, sales at low end of guidance

New CFO

Q3 results, Sun Edison announcement

New CEO

Source: Yahoo! Finance

Profitability

Proliferate market resulted in oversupply

Profitability

Management failed to control SG&A when sales fell

Liquidity

Hold large amount of cash/buffered the impact of ST debt

Efficiency

Inventory is highly correlated to sales

Efficiency

Declining operating efficiency

DuPont Analysis

DuPont Analysis            

2004 2005 2006 2007 2008 2009

EBIT margin 25.2% 23.2% 36.2% 44.2% 42.5% -6.4%

EBT/ EBIT 75.9% 98.2% 105.8% 130.8% 68.7% 150.9%

Net Income/ EBT 114.9% 98.8% 62.5% 74.3% 66.2% 61.0%

Assets Turnover 100.0% 96.5% 87.3% 66.6% 68.3% 32.7%

Financial Leverage 232.2% 161.4% 151.3% 141.9% 141.1% 164.1%

ROE 51.1% 35.1% 31.6% 40.6% 18.6% -3.1%

DuPont Analysis

Management Assessment

• Revised Q3 guidance (Sept.): $285-315 million in revenues, gross margins in “mid to high single digits”

• Q3 actual: $315 million in revenues, gross margins 6.6%

• Q4 guidance (Oct.): $310-350 million in revenues, gross margins 10-14%

• Q4 actual: $357 million in revenues, gross margins 14.9%

• Capital Markets Day presentation – CFO said he would release updated financials in one month; EDGAR filing in exactly one month

Revenue Assumptions

Materials BusinessSolar Energy (SunEdison)

MEMC Total

Semiconductor Materials Solar MaterialsMaterials

Business Total    

Growth Sales% of Total Growth Sales

% of Total

Growth Sales

Growth

Sales

% of Total

Growth Sales

2007  1,216

.9 63.3

%   704.9 36.7

% 25.0%1,921

.8 N/A 0.0 N/A 25.0%1,921.8

2008 -24.1% 923.1 46.1

% 53.4%1,081

.4 53.9

% 4.3%2,004

.5 N/A 0.0 N/A 4.3%2,004.5

2009 -36.5% 586.3 50.4

% -47.0% 573.5 49.3

% -42.1%1,159

.8 N/A 3.8 0.3%-

42.0%1,163.6

2010E 40.0% 820.8

50.2% 7.0% 613.6

37.5% 23.7%

1,434.5 N/A

200.0

12.2% 40.5%

1,634.5

2011E 8.0% 886.5

49.5% 10.0% 675.0

37.7% 8.9%

1,561.5 15.0%

230.0

12.8% 9.6%

1,791.5

2012E 8.0% 957.4

48.7% 10.0% 742.5

37.8% 8.9%

1,699.9 15.0%

264.5

13.5% 9.7%

1,964.4

2013E -5.0% 909.5

49.7% -10.0% 668.3

36.5% -7.2%

1,577.8 -5.0%

251.3

13.7% -6.9%

1,829.1

2014E 8.0% 982.3

49.1% 10.0% 735.1

36.8% 8.8%

1,717.4 12.0%

281.4

14.1% 9.3%

1,998.8

2015E 8.0%

1,060.9

47.3% 15.0% 845.3

37.7% 11.0%

1,906.2 20.0%

337.7

15.1% 12.3%

2,243.9

2016E 8.0%

1,145.8

46.5% 10.0% 929.9

37.7% 8.9%

2,075.6 15.0%

388.4

15.8% 9.8%

2,464.0

Discount Rate Calculation

Goalpost cost of equity = 15.5%

Risk-Free Rate4.00

% 5.00%Market Risk Premium

5.00% 6.00%

Beta 1.75 1.75

CAPM12.75

%15.50

%k(e) WFR 15.50%

Market Return (5-yr) 0.69%WFR ROE (5-yr) 7.24%CAPM Expected -2.17%WFR Alpha 9.41%

k(d) WFR 6.00%% Equity 89.6%% Debt 10.4%Tax Rate 25%

WACC14.36

%Adjusted Discount Rate = 15%

DCF Analysis• Current stock price: $15.96• 15% discount rate• 4% growth rate• DCF price: $12.40 Sensitivity Analysis              Discount Rate  12.40 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0%

Growth Rate

2.5% 16.61 14.39 12.58 11.07 9.80 8.72 7.793.0% 17.44 15.03 13.08 11.48 10.13 8.99 8.023.5% 18.36 15.74 13.64 11.92 10.49 9.28 8.264.0% 19.41 16.53 14.25 12.40 10.88 9.60 8.524.5% 20.59 17.41 14.92 12.93 11.30 9.94 8.805.0% 21.94 18.40 15.67 13.51 11.76 10.31 9.105.5% 23.50 19.53 16.51 14.15 12.26 10.71 9.42

Recommendation• HOLD current 600 shares

•Fair market value = $12.40 (DCF) - $13.21 (Multiples)•Plus $1.70/share in excess cash & ST-investments•High-low yearly price change = 108%•Fair market range = $8.30 - $17.20•Current market price = $15.96

• What to watch for:•Materials Business margins/pricing pressure•Government subsidies•Sun Edison ramp-up/profitability/transparency