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WFR – Time to look at the valuation (+44% upside)

|Includes:SunEdison, Inc. (SUNEQ)
WFR was trading down 10% below $14 on Friday. What happened? Not that much indeed! WFR reported 3Q09 results in line with its preannouncement on 9/8/2009. Margin will be lower than expected of around 10-14%, confirming, if not known yet, that MEMC business is a commodity business. MEMC also announced that it was acquiring SunEdison for $200M, an accretive deal in 2H10.
As a reminder: MEMC is a semiconductor wafer and solar wafer manufacturer. MEMC sells its products to most semiconductor device Manufacturers. The company operates nine plants that are strategically located close to the major semiconductor markets in the U.S., Europe, and Asia.
What makes me believe that we have a good entry point on MEMC between $13 and $14?
 
Valuation? Yes. A quick sum of the parts would give Semi wafer business = $9 + Solar business = $5 + Net Cash of $4 + SunEdison = $2. Total: $20, MEMC is trading at $13.87 or a potential upside of +44%
 
Average Analysts valuation on bloomberg is $18.21 with EPS 09E around $0.01 and 2010E around $0.92 (15x 2010E).
 
Semi business is booming around the globe, Solar is still behind the curve but that is obviously old news and already discounted in the share price.
 
Technicals and Peers?
 
RSI is oversold, Bollinger as well…

WFR RSIClick to enlarge
 
 
More interesting Maybe is on a relative basis…
 
Against Solar stocks (TAN ETF)
 
WFR vs TANClick to enlarge
 
Against SOX Index
 
WFR vs SOXClick to enlarge
 
Against Polysilicium and Wafer manufacturers
 
WFR vs PolyClick to enlarge 
 
This last chart is certainly the most interesting as it includes many companies like LDK with an extremely weak balance sheet whereas WFR has $4 of net cash per share.
 
I had many meetings with the WFR former and new management and I think that next quarter could mark an inflexion point if semi wafer prices are successfully increased in 1Q2010.
 
At $13.87, I am prepared to buy more shares for the medium term and to implement a more aggressive options strategy for the short term: Risk reversal. SELL the DEC09 13Put and BUY the DEC09 17Call, crediting around $0.5 with illimited upside.

Disclosure: Owner of WFR
 
 
Stocks: SUNEQ