Monday, March 19, 2007

Calls of Note Part 2

- FBR notes that recent checks suggest that despite a flattening in poly spot prices, MEMC (NYSE:WFR) has been able to sell higher than the previously expected amount of poly into the spot market, a trend that is expected to continue into 2Q07, therefore providing upside to their estimates. To that end, they increasing their revenue/EPS estimates and actually going above the consensus. 1Q07/CY07 pro forma EPS estimates have changed from $0.69/$3.01 to $0.70/$3.12, which compares to consensus estimates of $0.69/$3.04.

FBR's price target has also increased from $45 to $54, which is 5x CY08 EV/Sales and 10x CY08 EV/ EBITDA, which is driven by higher estimates, as well as some multiple expansion because of higher growth prospects. Unlike the previous years when a combination of insufficient transparency and restatements of quarterly results made us doubt long- term growth prospects, they have now increased confidence in MEMC's ability to capitalize on not only the shortage of poly, but also benefit from the secular growth of the solar industry.

However, their concerns are: 1) continued share loss in the semi wafer market, particularly in Japan and Korea, 2) ineffectiveness of long-term strategy at Chinese/Taiwanese solar cell/module manufacturers, which would adversely impact MEMC as two of its current solar wafer customers reside there.

Maintain Market Perform rating, but would become more aggressive if the shares pull back or more upside to estimates is determined.

Notablecalls: There was some chatter of a poly glut on Friday. Some names were hit pretty bad, including WFR which lost 2 points initially but managed to recover some of it after lunchtime. FBR has never been a fan of WFR and with the firm raising their ests above consensus, it warrants some attention. Not calling it outright actionable as the stock has been acting heavy over the past couple of weeks.

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