chia-chia hu evangelos kalogiropoulos pragnesh podar joseph vaccaro dec 2, 2008 memc electronic...

Chia-Chia HuEvangelos KalogiropoulosPragnesh PodarJoseph Vaccaro

Dec 2, 2008

MEMC Electronic Materials Inc. (WFR)

Presentation Outline

Company Overview Macroeconomic review and industry trends Historical Financial Analysis Portfolio Positioning Peer group comparison Relative valuation Financial Projections (DCF Model) Recommendation

Company Overview

MEMC Electronic Materials, Inc. is engaged in the design, manufacture and sale of silicon wafers

Based in St. Peters, MO

Produces both semiconductor wafers and solar wafers ranging in size from 100mm (4 inches) to 300mm (12 inches)

Strategy: “Continuous improvement of technology, market share, and profits.”

NYSE Ticker: WFR

Company History

Founded in 1953 Pioneer in wafer development & leader in supplying

semiconductor wafers for over 50 years

1995: IPO on NYSE under the ticker WFR

2001: After almost filing for bankruptcy, Private Equity Firm Texas Pacific Group acquires 72% of the company

2006: Announced the signing of $7-9 billion in contracts to deliver solar wafers (an $18 billion market at the time)

2008: One of four wafer companies with 10% or more of the market share.

What is a wafer?

MEMC supplies silicon wafers to the semiconductor and solar power industry globally

Wafer’s are the foundation on which the world’s semiconductors and solar cells are built

All the processes of a micro device are conducted on a wafer

Come in different sizes (1 inch to 12 inches in diameter) and in different thicknesses

Wafer sizes have increased device performance and reduced production costs

50mm, 100 mm, 150mm and 200 mm wafer

What is a Wafer?

New CEO

Oct. 30, 2008 MEMC Announces the Resignation of CEO Nabeel Gareeb- Marshall Turner appointed as interim CEO

Potential Reasons: Management overestimated targets the past 5

quarters Company faced production problems Stock severely underperformed the market Legal Proceedings

Source: MEMC 10K

Global Manufacturing

Source:"Bloomberg"

Geographic Revenue

Source:"Bloomberg"

Currency Risk

China 25%Upside

SWOT AnalysisStrengths

International diversification

Holds more than 10% of industry market

share

Contracts at full capacity for the future

Diversified between polysilicon and solar

wafers to reduce cyclicity risk

Weaknesses

Management continues to overestimate

forecasts

Industry requires extensive R&D

Difficult to differentiate product (leads to

price wars)

Capacity utilization could restrain growth

Opportunities

Emerging Markets (China, Taiwan, Korea)

Political Environment

Environmental Concerns

Currency Fluctuations

Commodity price increase

Threats

Economic recession

Current Downward trend in commodity

prices

Cyclical Industry

Volatility of polysilicon prices

Exposure to international competition

Wafer Industry Outlook The introduction of electronics and computer technology into our daily

lives is growing at an exponential rate.

One of the few markets that can improve device performance while sustaining steady revenue growth and reducing production costs.

There is a trend towards developing larger wafers (200mm and 300mm)

MEMC's overall success depends on the success of products that use silicon wafers, specifically semiconductors and solar cells

The need for high degrees of flexibility and innovation in order to constantly adjust to the rapid pace of change in the market.

Source:"MEMC 10K"

Wafer Industry vs. Semiconductor Industry

•The success of the Wafer Industry is highly correlated to the Semiconductor Industry

Solar Industry

Global Opportunities: Rise in commodity prices

Growth prospects in Asia International Pressure for China to adopt

clean energy(China accounts for 21% of REMC’s revenue)

Opportunities within the U.S. Public Awareness of Environmental

Concerns Political Support

Political Support President-Elect Barrack Obama has a green agenda

Obama has proposed investing $150 billion into the renewable energy sector over the next 10 years

His proposal also requires that one-tenth of the country's energy be derived from renewable sources (currently 7%)

The summer spike in oil and commodity prices forced Americans & Congress to consider the use of alternative resources

Tax credits, strict adherence to state renewable portfolio standards and new leadership in Washington all may play a role in turning the economy green

Increasing Renewable Portfolio Standards and the carbon trading system/carbon tax in the U.S. should favor solar energy

Income Statements

2005 2006 2007

Net Sales $1,107.4 $1,540.6 $1,921.8

Cost of Goods Sold 740.9 851.6 921.3

Gross Margin 366.5 689.0 1,000.5

Operating Expenses 109.5 130.7 150.6

Operating Income 257.0 558.3 849.9

Non-Operating (Income) Expenses (4.6) 32.2 261.9

Operating Expenses 109.5 130.7 150.6

Minority interests (5.8) (6.4) (3.4)

Net Income $ 249.4 $ 369.3 $ 826.2

Source:"MEMC 10K"

Cash Flow

Balance Sheet - Assets2005 2006 2007 2008Q3

Cash and cash equivalent $ 126.5 $ 527.5 $ 859.3 $ 932.3

Short-term investments 27.1 58.0 457.1 187.3

Accounts Receivables 125.2 199.1 197.9 239.6

Inventories 120.0 80.2 36.4 41.1

Prepaid and other current assets 37.5 34.8 38.8 28.4

Total Current Assets 436.3 899.5 1,589.5 1,428.3

Investments - - - 317.8

PP&E net 494.9 603.5 834.0 976.4

Deferred Taxes, net 165.6 119.5 89.3 89.8

Other Assets 51.3 143.0 374.4 172.0

Total Assets $ 1,148.1 $ 1,765.5 $ 2,887.2 $ 2,984.3

Balance Sheet – Liabilities2005 2006 2007 2008Q3

S/T Debt and current portion of L/T Debt $ 18.3 $ 5.0 $ 5.3 $ 5.7Accounts Payable 105.5 125.4 168.3 141.2Accrued expenses 74.9 67.9 72.7 97.1Deferred Revenue 14.6 5.2 122.0 209.8Taxes Payable 11.6 54.3 75.9 69.3 Total Current Liabilities 224.9 257.8 444.2 523.1Long term Debt, less current portion 34.8 29.4 25.6 24.6Pension and post-employment liabilities 91.0 85.2 60.6 42.0Deferred Revenue - 68.1 81.4 89.7Other L/T Liabilities 41.4 119.5 204.6 190.0Total Liabilities 392.1 560.1 816.4 869.4

Balance Sheet – Equity

2005 2006 2007 2008Q3

Minority Interests 44.6 38.6 35.8 35.9

Common Stock 2.2 2.2 2.3 2.3

Treasury Stock (4.3) (4.3) (115.6) (401.8)

Additional Paid in Capital 191.7 242.5 358.0 431.6

Deferred Stock comp (0.1) - - -

Retained Earnings 557.7 933.8 1,760.5 2,077.6

Other Accumulated (Loss)Gain (35.9)

(7.4) 29.8 (30.2)

Total shareholders' equity $ 756.0 $ 1,205.5 $ 2,070.8 $2,115.4

DuPont Analysis

2005 2006 2007Revenues 1,107.4 1,540.6 1,921.8

Net Income(Gain on fair value of warrant)

249.4 -

369.3 (18.9)

826.2 (220.8)

Total Assets 1,148.1 1,765.5 2,887.2

Total Equity 756.0 1,205.5 2,070.8

Net Profit Margin 22.52% 23.97% 42.99%

Asset Turnover 0.964 0.872 0.665

Leverage 1.518 1.464 1.394

ROA 21.72% 20.92% 28.62%

Return on Equity (ROE) 32.99% 30.64% 39.90%

Current Portfolio

Current Position

• RCMP purchased 200 shares of WFR on

March 13th, 2008 for $78.15/share.

• Currently WFR is trading at $12.33 as of

December 1, 2008 for an unrealized loss of

$13,164 or 84.22%

Source:"Bloomberg"

Peer Valuation

Source:"Bloomberg"

Price Ratio Valuation

Source:"Bloomberg"

Peer Valuation

Source:"Bloomberg"

Historic PE Valuation

P/E Valuation

5 year average of 18.4X Return to 5 year average for C2009

estimate Assuming Range of 16-20, Gives a potential

price range of $42-$52 Conservatively, at the lower end of the

range, price target is $42 Current assets include over $900 million in

cash and liquid investments.

Long-term contracts(Solar Cell Manufactures)

$3-3.5B Tainergy Tech Co. LTD (Taiwan) $7-8B Conergy (Germany)

3-4B Gintech (Taiwan) $7.5-9B

Suntech Power Holdings (China)

Total estimated worth of contracts $15-18B over the next 10 years (10K, 2007)

Fixed price (dollar-per watt basis) and take or pay contracts

Growth assumptions

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Semiconductor

Solar

Semiconductor sales are set to slump next two years due to the upcoming recession

Slow down in solar industry (2008-2010)1. Low oil price 2. Lack of funds for investments in solar energy 3. Possible relaxation of the environmental obligations until the

recovery of the economy4. Too costly now for the firms to apply the proper equipment

"This model was initially created by David Light"

31

Application of the assumptions

DCF Inputs

Inputs Value CommentsWeight of DebtWeight of EquityCost of debt Cost of equityβRfReturn on the marketTax rateSustainable growth rate(g)WACC

0.72%99.28%5.8%22.72%2.344%12%33%4%22.58%

MV equity & BV debtMV equity & BV debtbloombergCAPMgoogle. finance Yield on 10-year TreasuriesBased on our assumptionsEffective tax rate (10Q³,2008)LT Growth rate of US GDP

DCF model

DCF valuation results

Market value per share at 2-Dec-08 is $12.99. 10% range $16.916-$18.697

Present Value of FCF $4,162.24M

Less: Debt $25.6M

Equity Value $4,136.64

Outstanding shares 232.3M

Value per share $17.807

Sensitivity Analysis

Range $15.828-$20.561

Correlation with RCMP Portfolio

  WFR AEE AEO CPRT DO FR JKHY KMB SRCL WAG

WFR 1.0000  

AEE 0.3330 1.0000  

AEO 0.4906 0.4542 1.0000  

CPRT 0.3403 0.1978 0.4156 1.0000  

DO 0.4421 0.6058 0.4575 0.2975 1.0000  

FR 0.4071 0.4152 0.5233 0.3446 0.5153 1.0000  

JKHY 0.3566 0.5980 0.5350 0.2841 0.4462 0.6480 1.0000  

KMB 0.3354 0.6928 0.4649 0.2692 0.5049 0.5540 0.6652 1.0000  

SRCL 0.3279 0.4944 0.3540 0.2060 0.4234 0.4351 0.4408 0.6053 1.0000 

WAG 0.2999 0.5408 0.5620 0.3595 0.5074 0.4535 0.4956 0.5404 0.4980 1.0000

Legal proceedings

On March 31,2008, two lawsuits against MEMC from a customer concerning violation of agreements by the side of MEMC.

On Sep. 16,2008, and on Oct. 10,2008 two class action lawsuits against MEMC and its former CEO from investors. They allege that during the Class period, the firm engaged in a scheme to inflate MEMC’s stock price by failing to certain material facts regarding MEMC’s operation and performance violation of Section (10b).

Recommendation

Buy 400 shares of MEMC Electronic Materials Inc (WFR) at the current market price

Our conservative analysis indicates that the stock is significantly undervalued

Long-term solar contracts worth 15B-18B. Plenty of cash and no debt are good

features under the current market. One of the four largest silicon wafer

producers worldwide.

Q & A

Any Questions?

"Bloomberg"

Renewable Energy & Oil-- Alternative Energy Index

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