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Do not underestimate the future of MEMC

MEMC’s stock price promptly tumbled below $10 after their disappointing 2010 Q2 earnings, mainly due to lower revenue from SunEdison.  We’re all aware of the difficulty in predicting the earnings of SunEdison on a quarter by quarter basis so the reaction of the stock price seems kind of harsh.  I believe with MEMC, it’s worth looking at the bigger picture.

MEMC has always been a silicon wafer manufacturer where it’s earning is directly tied to the pricing of wafers in which they have no control over.  It’s a highly cyclical business and that reflects pretty clearly on the history of MEMC’s stock price.  In this current downturn, MEMC has taken advantage of their cash hoard and acquired SunEdison and Solaicx.  In my opinion, both highly complimentary acquisitions that will no doubt boost their solar business in the future.  Being an optimist and shareholder, I’ll even go a step further and say with these two acquisitions, MEMC has begun to transform itself into a vertically integrated, distributed energy company.  We already know that MEMC is very capable of manufacturing solar wafers but in the long run, that’s not a very attractive business to be in.  They put themselves in direct competition with the low cost Chinese solar companies where the motto is “reduce price till you’re out of business then reduce some more”.  The value in the solar business has moved downstream and the acquisition of SunEdison allows MEMC to capture the entire value of the solar business from solar wafer to installation, financing, and maintenance.  In effect, that makes MEMC look more like a utility company or more accurately, a distributed energy company that will compliment traditional utility companies.   The side effect of this would be more stable earning and break free from the cycles of silicon wafer pricing.  As the cost of solar energy gradually drop toward grid parity, SunEdison business will look more and more attractive.  In five years, I would be disappointed if SunEdison is not MEMC’s biggest segment.   Being vertically integrated will allow MEMC to have a cost advantage over their competitors although at this point it’s too early to predict which solar technology will eventually turn out to be the most cost effective.  However I don’t doubt that solar will be a significant mix of our energy generation in the future.  MEMC has positioned itself to be a player in solar even if silicon goes out of favor.

Disclosure: Long WFR