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MEMC Electronic Materials (WFR) supplies silicon wafers to some of the world's leading semiconductor makers. The company makes wafers in sizes ranging from 100mm to 300mm -- 4 inches to 1 foot -- in diameter. In addition to its standard prime polished wafers, MEMC makes epitaxial wafers (which have an added layer of single-crystal silicon) for advanced chips, as well as lower-grade wafers used to test chip-making equipment and production lines. The company also makes solar-grade polysilicon, which goes into making photovoltaic solar cells. Solar wafers are becoming a fast-growing product for MEMC.

If only I had discovered this stock in 2001 when it was selling for $1.00 a share, I would have made 60 times my money by now, assuming I had the staying power to hold onto this rather wild ride. With the stock recently hitting all time highs of $66, investors need to be cautious about buying this stock. Or do they?

Earnings are the fuel for this rocket. You might argue that this stock is underpriced at $57 a share. That's because earnings are predicted to be $3.90 next year (a forward P/E of a little over 15). Analysts are also predicting earnings will grow by 28% a year, on average over the next 5 years while revenues ramp by 18% a year, on average, in the same time period.

Of course, most of that rosy projection depends on how well the semiconductor industry does (about 20% of revenues come from polysilicon, used in photovoltaic solar cells). That's what makes investing in semiconductor makers a little tricky. They can't control their own destiny. When computers are hot, and technology is changing (in this case, wafers are going from 200 millimeters to 300 millimeters), demand skyrockets, and every computer manufacturer wants more chips. But when end demand slackens, the chip makers feel it first and the longest. Orders stop for wafers and don't pick up until most or all of the computer inventory is sold.

Right now, everything's going MEMC's way. Along with the migration to larger wafers, there is strong demand for computers as inventories have been sold to very low or nothing. Price increases have been sticking. Management stated that price hikes have held because both size wafers (200 and 300 millimeters) are in good demand. In addition, MEMC's solar wafers are enjoying increased orders as new companies have a difficult time getting into the business due to large capital and technological knowledge requirements.

Here are some of the numbers: Return on Equity is an eye popping 32%. This year it should be 43%, next year 38.5%. Net profit margins were 24% last year. Analysts are looking for 36.1% this year and 36.2% next year. Debt is only 2% of the balance sheet. The company will buyback $500 million of its stock as announced recently by the board. Sales were $1.54 billion last year. This year look for $1.92 billion, $2.33 billion next year. Officers and directors own about 5% of the shares.

If computers continue to sell strongly, then MEMC's future is very bright. Add in the increased demand for its solar cells, and it brightens further. If you can stand the sharp downdrafts all tech stocks endure, this one may be well worth more of your time to investigate.

WFR 1-yr chart

wfr

Disclosure: none

Source: MEMC Electronic Materials: The Future Looks Bright For Solar Wafers