MEMC Electronic Materials, Inc. (WFR) produces the raw material wafers used by semiconductor manufacturers in the production of integrated circuits (ICs). The decision to supply wafers to the solar industry is paying huge rewards as demand for polysilicon has raced ahead of supply.
The Solar business and the 300mm business are both high margin products and the firm is projecting a 250 basis point (bps) increase over the next quarter. The December top-line missed the consensus estimates due to a one-day delay, while the bottom-line beat by $0.02.
We are reiterating our Buy rating on the Shares of WFR. The stock presently trades at a multiple of 17.4x our estimate of 2008 earnings (P/E) (pro-forma adjusted for Stock option comp).We expect the firm to outgrow the general semiconductor industry based on its 300 millimeter product line and its solar business. The firm's balance sheet has improved dramatically and cash now stands north of $1 billion. This should pave the way for future share buybacks and potential mergers in the solar industry.
Despite the top-line and gross margin miss this quarter, margins continue to improve. We feel the weaker TSMC capital expenditure numbers are not a sign of weakness, but the situation bears watching.
We value the company based on the average of our P/E multiple (26.0x 2008 estimated EPS) and our two stage intrinsic model. The semiconductor group average P/E is between 25x-26x. We feel WFR should trade at a premium to its peers, given the fact that the company has high growth/high margin products.
Read the full analyst report on WFR.
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