Wednesday, September 24, 2008

MEMC Elec (NYSE:WFR): Bounce play on RBC upgrade and lowered bar

RBC Capital upgrades MEMC Elec (NYSE:WFR) to Outperform from Sector Perform with a $53 tgt based on a likely renewal of demand growth in the solar sector led by pending passage of an 8-year extension and expansion of the U.S. solar tax credit program and a compelling valuation which they believe indicates over-pessimism baked into current share prices. Firm notes their upgrade is in conjunction with their macro report upgrading the entire solar sector, as they believe sector stocks are near a bottom. Their caution on WFR this year has been predicated on silicon oversupply risks in 2009 exacerbated by the company's execution issues. But they believe the fundamental headwinds in semi pricing, deterioration of spot poly prices in 2009 and a limited upside to Q3 #s from hurricane Ike impact is more than baked into the shares - trading at ~6x FY09E of $4.84. While FY09 sensitivity analysis is difficult given minimal mgmt biz unit disclosure, the firm believes current multiples reflect no growth, an unlikely prospect given oversupply timeframe likely shifted to 2H09 or 2010 on U.S. subsidy action and potential additional catalysts from even more robust U.S. energy policy with a new administration.

RBC highlights the company's $1.4B cash position, no debt, and ~$150M cash flow per qtr. A 6x forward multiple represents an historically low mark, even looking back to previous semi cycle downturns and large discount below the 9-11x multiple of comps such as Wacker Chemi and Shin-Etsu.

Q3 Outlook: they believe the shutdown of the Pasadena plant for Hurricane Ike soaked up the remaining buffer in mgmt's Q3 guidance. Although the plant was not damaged, raw material deliveries were delayed and the firm believes some labor was impacted as they took care of their families. They are adjusting their Q3 estimates to Rev/EPS of $573M / $1.06 from $603M / $1.13.

Notablecalls: Senate passed alt energy extension 90-2... the house will vote with the senate most likely.. Spain ups susidy to 500MW from 300MW... finally some relief for the solar names.

I spoke to one Solar watcher this morning who noted the only other sector he can compare Solar to is the mobile sector that took off in the 90s... it had its downturn in early 2000s (most names being cut down to 1/3 of their value) but eventually rebounded due to fast growth and M&A.

With WFR guiding today..I think it represents a nice potential bounce play. The bar has been lowered.

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