J.P. Morgan analyst Christopher Blansett turned bearish on MEMC Electronic Materials (WFR) Wednesday morning, cutting his rating on the stock to Underweight from Overweight, and setting a price target of $12, well below Tuesday’s close at $17.86.
The downgrades, he writes in a research note, reflects “faster than expected ASP declines in all of the company’s product lines.” He says overall supply of polysilicon, which is used to make silicon wafers used in both the chip and solar industries, “will far exceed” demand for the rest of this year and into 2010, driving down spot market poly pricing as well as semi and solar wafer pricing.
Blansett previously had been expected the spot price to reach $60/kg by year end, but he notes that the market has already touched that level. He now says poly could drop to $35/kg by the end of 2009, “a price point lower than the manufacturing cost of many new poly makers” and relative cost parity for the large incumbent players.
The analyst writes that an over-supply is “inevitable” given the sheer volume that is expected to come on line this year. “Unfortunately, actual solar PV demand today is a lot lower than last year’s expectations which initially drove the aggressive capacity expansion,” he writes. “This is resulting in massive over-supply of polysilicon which could last for years if current announced capacity expansion plans are not scaled back.”
Blansett thinks MEMC may need to revised its solar wafer contracts (again) given the continued fall in spot poly pricing. He says a spot price below $50/kg would make the company’s current supply contracts “unpaltable” to solar wafer customers and could put them at a competitive disadvantage given that poly is usually more than 50% of the cost of a solar wafer.
For 2009, he cuts his EPS estimate to 19 cents, from 24 cents. For 2010, he goes to $1.06, from $1.15.
Meanwhile, Citigroup’s Timothy Arcuri points out in a research note that GCL Silicon, the leading Chinese poly manufacturer, is being acquried by its parent, Hong Kong-based GCL Poly Energy, in a deal worth about $3.4 billion. Given the deal was struck at a valuation of $160/kg of capacity, he says that this “highlights the value that in-the-ground polysilicon assets continue to command even in this tough demand environment.” Doing some back-of-the-envelope math, he concludes that WFR’s solar business is worth 3x the replacement value of its assets, adds back the value of the semiconductor business and cash, and comes up with a valuation of about $20 a share. But he maintains his Hold rating and $15 target.
WFR Wednesday is down 61 cents, or 3.4%, to $17.25.