MEMC Electronic Materials Inc. (WFR) Brandon Lee and David Light March 11, 2008
Outline: What is a Wafer? ¡ Industry Outlook ¡ Company Overview ¡ Competitors ¡ Valuation & Portfolio Fit ¡ Recommendation ¡
What is a wafer? ¡ A thin slice of semiconductor material used to make microchips and other micro devices ¡ 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 A silicon wafer
Outline: What is a Wafer? ¡ Industry Outlook ¡ Company Overview ¡ Competitors ¡ Valuation & Portfolio Fit ¡ Recommendation ¡
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 (200 mm and 300 mm) ¡ Over the past 10 years, the wafer industry has consolidated and only four companies have 10% or more of the market share ¡ Highly correlated with semiconductor industry
Wafer Industry vs. Semiconductor Industry
Wafer Market Size and Growth
Outline: What is a Wafer? ¡ Industry Outlook ¡ Company Overview ¡ Competitors ¡ Valuation & Portfolio Fit ¡ Recommendation ¡
Company Overview ¡ MEMC produces silicon wafers for the semiconductor and solar power industry globally ¡ Based in St. Peters, MO ¡ Produces both semiconductor wafers and solar wafers ranging in size from 100 mm (4 inches) to 300 mm (12 inches) ¡ Strategy: “Continuous improvement of technology, market share, and profits. ” ¡ NYSE Ticker: WFR
Expanding into Solar Market ¡ Began producing solar wafers in 2007 ¡ Currently outsources production l Bringing production in house in 2009 l Improved margins ¡ Has contracts signed worth $15 -18 BN over the next 10 years ¡ Has current capacity for one more contract over that time worth another $2 -3 BN ¡ Solar represents a 30% annual growth market
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 ¡ 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.
Management Team: ¡ Nabeel Gareeb – President, CEO, and member of Board of Directors l l ¡ John Marren – Chairman of Board of Directors l l l ¡ Joined MEMC in April 2002 Holds a Masters of Science in Electrical Management and a Bachelors of Science in Electrical Engineering Has been with MEMC since November 2001 Partner of Texas Pacific Group Board of Directors of Conexant Systems, Inc. and ON Semiconductor Corporation Dr. Shaker Sadasivam – Senior VP, Research and Development l l Has been with MEMC since 1993, serving many different roles Holds a Doctorate’s and Masters in Chemical Engineering and a Masters in Business Administration
Statistics: ¡ Trailing P/E: 20. 83 x ¡ Forward P/E: 14. 20 x ¡ ROA: 22. 83% ¡ ROE: 51. 62% ¡ Debt to Equity Ratio: . 015 ¡ Current Ratio: 3. 578
Investment Thesis: ¡ Great Visibility ¡ Strong Long-Term Solar Growth ¡ Good Pricing Power (12 -18 months) ¡ High barriers to entry in Polysilicon ¡ Very efficient operator ¡ Signed Contracts not yet reflected in stock price
Outline: What is a Wafer? ¡ Industry Outlook ¡ Company Overview ¡ Competitors ¡ Valuation & Portfolio Fit ¡ Recommendation ¡
Competitors Year 1990 2005 Number of Suppliers MEMC Mitsubishi SEH Sumitomo Wacker Komatsu Nippon Steel TI Siemens Motorola Solarex Hitachi Toshiba LG Siltron Siltec IBM Topsil Unisil AT&T Crysteco Kawasaki Steel MEMC Mitsubishi SEH Sumitomo Wacker Komatsu LG Siltron Siltec Toshiba Nippon Steel MEMC Shin-Etsu Handotai SUMCO Wacker Komatsu Toshiba LG Siltron Total 21 10 7
Porter’s Five Forces ¡ Barriers to Entry: Highly specialized and technical industry with very few competitors and high barriers to entry. 3 years to build a polysilicon plant, 18 months to build a wafer plant. ¡ Bargaining Power of Buyers: Low. There used to be a lot of wafer companies, but consolidation has led to fewer competitors. l Only four companies with 10% or more of market share. ¡ Bargaining Power of Suppliers: Low. MEMC manufactures their own polysilicon, the major raw material used in making wafers. ¡ Threat of Substitutes: Somewhat high. Anyone making highquality wafers is a threat to take share and increase rivalry. ¡ Rivalry: Fewer and fewer competitors in recent years.
Outline: What is a Wafer? ¡ Industry Outlook ¡ Company Overview ¡ Competitors ¡ Valuation & Portfolio Fit ¡ Recommendation ¡
WFR vs. S&P 500 (1 Year)
WFR vs. S&P 500 vs. S&P Semiconductors Index (5 Year) Source: 2007 Annual Report
Revenue Projection
DCF Assumptions WACC: 13. 95% ¡ Long-term growth: 5% ¡ Beta: 1. 66 ¡
DCF Valuation ¡ Current Price: 71. 93 ¡ DCF Value: 87. 10 ¡ Intrinsic Value: 78. 40 -95. 82 ¡ Estimated Total Return: 21%
DCF Assumptions
Portfolio Fit
Outline: What is a Wafer? ¡ Industry Outlook ¡ Company Overview ¡ Competitors ¡ Valuation & Portfolio Fit ¡ Recommendation ¡
Recommendation: ¡ BUY 200 shares of WFR at market price ¡ Approximate cost: $14, 822. 00 ¡ Increases total number of holdings to 13. ¡ WFR will represent approximately 4. 12% upon purchase ¡ WFR will expose the RCMP portfolio to the semiconductor industry and alternative energy
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