MEMC (WFR), a manufacturer of silicon wafers, has seen a “perfect storm” of bad news that forced the stock down almost 50% off its 52-week high. The issues include:
- manufacturing hiccups
- the threat of new entrants creating an oversupply of polysilicon
- slowing semiconductor demand due to inventory builds
- potentially negative near-term news on solar subsidies that drives demand for WFR’s wafers
- declining oil prices
- a weak macro environment
But no worries says AmTech’s John Hardy. WFR may have followed the rest of the solar industry down the tubes, but the company is “among the most defensive and potentially profitable ways to benefit from solar unit growth.” Hardy acknowledges the above concerns and counters each of them:
We believe each one of the above concerns is valid to a point, but short-term in nature. We believe execution mis-steps are now behind the company. We have yet to see a meaningful contribution of high purity polysilicon available from new entrants. While it is possible for solar demand to soften, we believe other geographies will pick up the slack in the event legislation is less favourable for the solar industry in the US and/or Spain. We believe square inches of silicon consumed by the semiconductor industry will continue to increase as complexity of devices and unit growth in high volume markets such as memory benefit from demand elasticity. Lastly, we believe a more stable stream of cash flow generation from long-term contracts will ultimately reward shareholders with higher equity value.
So that’s it? Back to $90? Probably not until oil prices take off for the moon again. But the farther MEMC falls, the more it has one thing going for it: valuation. At $50, it’s trading at about 5X revenue and 20X free cash flow. Not “cheap,” certainly, but also far from outrageous.
AmTech reiterates BUY on MEMC (WFR), target $65.
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