WFR: Value, Or Value Trap?

WFR is a wafer manufacturer who specializes in high performance products for the semiconductor and solar industries.

The Good:
Riding the wave of rising prices for solar poli-silcon products, WFR has increased its cash and investments hoard to a current $1.4 billion (@$6/share) at year-end 2008 from just over $150 million at year-end 2005. WFR also ended 2008 hitting $2 billion in revenue and $1 billion in solar related revenue.

The Bad:
Management predicts First Q2009 sales at around 50% of 4Q2008 levels (although they still predict around 20% gross margins which would still lead to achieving net profits for the quarter).

The Ugly:
Poli-silicon prices have dropped from @ $400kg levels to $125, with industry predictions down to $45-75kg.

2009 Outlook:
Taking into account a 50% sales decline for 2009, I came up with an estimate of .30 for the year (see computations), which, when stripping out the cash portion of the stock price, leads to a 2009 trough level P/E of @30.

Is this a value?
Fundamentally, at a P/E of 30 WFR appears to have further downside. Also, technically speaking, WFR doesn't appear to have much support, and has jumped up on upgrades only to lose ground quickly (see chart).

On the positive side, crashing poli-silicon prices will benefit WFR as higher cost competitors leave the space. Also, lower prices make solar energy cheaper, and will lead to an increase of overall demand for the product. On the wafer side, WFR has separated themselves as a high-end technological leader whose products are needed to maintain a competitive advantage.

Conclusion:
I would rate WFR a buy at these levels because of three things. First, its cash balance allows it the flexibility to operate free of credit concerns. Second, demand for solar has dampened due to a decline in oil prices, but the crude run up created a greater trend towards alternative energy that remains strong. Third, $0.30 EPS estimate, although a huge drop off from 2008's level, is still positive and is impressive given the cyclicality of the semi industry. Last, although it can be argued to have patience and wait for a confirmation of stabilization of sales, I believe one would miss a great part of the move higher.

12 Month Price Target: 25-30.

Stock position: None.

Comments

[David666:]

The word is "polysilicon", as in polycrystalline.

Feb 22 07:09 AM

[donzelion:]

"First, its cash balance..."

Concur, but I'd want to see the bleed rate in 3 months time. WFR has never operated in this sort of an environment: nobody has. I'll look at the rate they're burning cash, compare it to whatever actually gets reported from the wafer-makers in China, and then make a call.

"...the crude run up created a greater trend towards alternative energy that remains strong."

The crude run up in the 70s also created a push toward alternative energy; again, I want to see when the money starts getting spent, and then follow.

"positive EPS is impressive given the cyclicality of the semi industry..."

WFR is in an unsual part of the semi industry though, and the driving fundamentals are distinct for these sorts of semis v. computer chips. I'm not sure that this is impressive or not; I want to compare across the industry (and see how many pipeline projects get canceled).

"wait, and you could miss out..."

There's no rush. You could miss out, you could lose everything. WFR pays no dividend, so I'll increase my INTC position rather than my token WFR position, and collect a dividend while waiting for the storm to subside.

Feb 22 12:33 PM

[ArtfulDodger:]

Good points. But with such a glut of poly-chips on the market, it might be justified to wait through first quarter earnings.

Feb 22 01:36 PM

[mbr:]

Useful article and comments.

Feb 23 05:16 AM