Finding winninginvestment ideas isn't just about being correct;
it's about being timely. Nearly a year ago,upside lay ahead for
MEMC Electronic Materials (
Thestock had plunged from more than $80 in early 2008 to just $4
by the time I predictedshares would double (back to $8). I noted
that its semiconductor and solar power businesses appeared to be
close to bottoming out, and that the picture for each division
would soon improve.
It's that part, "close to bottoming," that really tripped me.
This stock didn't double in value -- it actually lost half of its
value. Simplyput , the company had one morewave of weak quarterly
results to deliver to investors. Mycall for aturnaround was quite
Well, the tide eventually turned, and shares are on the mend. I
still see this stock going to $8.
How could a stock go from being loathed to loved in such short
order? Five key factors have helped change sentiment:
- The semiconductor wafer business has clearly turned the
corner, thanks to industry-wide capacity cuts that brought supply
down to the level of demand.
- The company's solar division continues to ink new and
profitable contracts, despite fears that the multi-year swoon for
solarstocks would drag down WFR's SunEdison division as
- A recently-hired new chief financial officer has done a much
better job of explaining the company's admittedly complex capital
allocation structure, and has done a better job of explaining how
the companywill be able to deliver increasingly robustcash flow
- Fourth-quarter results exceeded top and bottom-line
forecasts, which is a clear break from past trends of quarterly
- MEMC is now in a much stronger financial position.
Of course, we're still talking about a stock that has tanked
from $80 to $5 in the past five years, so MEMC is hardly the
picture of health. For example, the semiconductor wafer division
will benefit from firmer pricing, but gross margins are still
unlikely to exceed 5% this year. In the middle of the last decade,
this division had 50% gross margins. Simply returning to 10%
margins by 2014 or 2015 would materially boost this stock. Even
with its current paltry gross margins,analysts at UBS say the
division is worth $2.80 a share, while analysts atCredit Suisse
pagefair value for the division at $4 a share.
How realistic is it to expect 10% gross margins in this
division? Well, management says that any incrementalrevenue beyond
the current base of $900 million willyield 50% gross margins. Keep
in mind this division routinely generated $2 billion in annual
sales in the middle of the last decade. Assuming $1.3 billion in
revenue by mid-decade, this division should again throw off decent
Yet it's the fast-growing solar division that is really coming
into focus for investors. Rather than selling solar panels -- a
dismal business if there ever was one -- MEMC decided to go
upstream and use its panels as part of broader power-plant
developments. The company currently has abacklog of 927 Megawatts (
) for plants to be built through the end of 2014.
Many questioned this wisdom of a semiconductor wafer maker
entering into solar power plant constructionmarket , and the move
bled huge amounts ofcash from thebalance sheet . But the outlook is
starting to really strengthen for the division. Management is
expected to spend a great deal of time with analysts on March 13,
walking through the growth in backlog at this division and what
that means for future cash flow generation.
One of the reasons this stock plunged last summer was because of
growing concerns that MEMC would hit a rough patch on its balance
sheet and perhaps run out offunds . A series of recent steps have
shored up the balance sheet, and the company now has $573 million
in cash on hand, and totalliquidity exceeding $800
million.Long-term debt of $2.4 billion is still a concern, but now
looks increasingly manageable.
Analysts are becoming increasinglybullish on the stock. Credit
Suisse and Lazard recently raised their price targets to $8,
representing more than 50% upside from current levels.
Risks to Consider:
MEMC will need to deliver several more solidquarters and show
signs that the semiconductor business is restrengthening before
investors push this stock up toward the $8 mark.
Action to Take -->
Despite the strong rebound in shares, investors can stillprofit
from MEMC's rebound. I strongly suggest investors to listen to the
company's March 13 webcast, as it will help investors make sense of
an admittedly complexbusiness model . Management paid the price on
the past for this complexity, though its bold moves are now
starting to pay off.
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