Merrill Lynch is raising price tgt on MEMC Electronic Materials (NYSE:WFR) from $60 to $73 as a result of their higher 2008 estimates reflecting stronger polysilicon pricing.
Semiconductor wafer prices are also rising while volumes should increase after 1Q07. Given the sustainability of these trends, firm's price target only requires that the current 19x 2007 P/E is maintained as valuation shifts to their new 2008 estimates. This is conservative vs. their 21x sum of the parts peer valuation calculation.
Several poly suppliers have recently signed long term contracts with semiconductor and solar companies, and others are taking prepayments signaling a tight market for several more years. In the biggest move, REC, announced a 7-year agreement to supply poly to SUMCO, the 2nd largest semi wafer maker, with rising pricing through 2010! This shows that the tight poly market is increasingly impacting the semiconductor market and not just solar.
Falling solar costs from technology driving market growth Solar cell makers are finding ways to lower the cost per watt of electricity through technological advances which is spurring market demand and volume growth that keep poly supply tight.
Firm raised their operating EPS estimate (w/stock comp, 17% cash tax) for 2008 from $3.55 to $3.85 on stronger revenues of $2.32 billion (up 6% from $2.185 billion previously). Firm's estimates are slightly above consensus and reflect a higher contribution from solar, as their semi assumptions remain largely intact.
Notablecalls: Expect to see initial pop in the shares but wouldn't stay on board for too long after such a run over the past few days. Also, Merrill is just highlighting the same reasons that have been behind the run.
WFR 1-yr chart: