MEMC: No Reason For Growth To Slow

Jan.29.07 | About: SunEdison, Inc. (SUNEQ)

MEMC Electronic Materials, Inc. (WFR) announced inline fourth quarter earnings results Thursday night, and issued upside guidance for the first quarter and full year 2007. The stock, which was a big position for me when I was working for a hedge fund in Geneva (and I recommended at about $17 some two years ago for, has been flying since Friday morning and is quickly drawing critics.

The funniest thing I have read so far is, "I don't like commodity companies when business is this hot." I will leave the source as anonymous as to prevent public embarrassment when shares eclipse $70 or $80 this year, as I expect.

MEMC is, at its core, a commodity player. The company makes its own polysilicon and wafers, which it then sells to semiconductor manufacturers and solar cell, module, and panel makers. Yes, polysilicon is a commodity, and yes, there are inventory issues always threatening the semi-side of its business.

However, MEMC is also still in the early innings of a multi-year shortage of polysilicon for solar players that is driving higher ASPs for both the solar and semi channels. In addition, the transition to 300mm wafers on the semi-side is driving higher ASP's (about 20% of revenue today but growing to 40% in 12 months) of at least 100% relative to 200mm wafers. Also, the company is slowly adding poly capacity, and is taking advantage of strong spot demand for poly in the solar space by selling 'excess capacity,' which is nothing more than what they are able to suck away from contracted amounts in the near-term as the contracts ramp, into the open market.

Are gross margins at risk? Well management is predicting continued gross margin expansion from the above factors. And if demand does, for whatever odd reason, fall precipitously as the semi group works through some inventory issues, investors should take comfort in management's prudent inventory management with inventories in days down again this quarter.

If the company can earn, as it expects, $3 a share, in 2007, shares can fetch a 25 multiple in no time.

WFR 1-yr chart

One caveat: TPG will sell more shares into the open market in early 2007, which could serve as an overhang. Note, though, that the last time they sold stock was at about $35 a share in late 2006, or some 15-points ago.

Oil is a commodity, and this same critic who says he doesn't like commodity stocks today was writing a lot back in 2004 about oil as a commodity… big miss in hindsight.

Disclosure: Author has no position in WFR