Friday, September 12, 2008

MEMC Elec (NYSE:WFR): Sell-Off offers entry, Reit Buy & $70 tgt - Merrill Lynch

Merrill Lynch is defending MEMC Elec (NYSE:WFR) this morning after the co announced they are anticipating a loss of 5 days of polysilicon production due to hurricane Ike. As management had already built in a 2 week buffer as part of their quarterly guidance, the disruption has not changed management’s outlook for the quarter.

On the mid-quarter update call management said if production in September was at the same level as August, they would be in the upper half of their guidance range. In August, hurricane Edouard plus maintenance on Unit 1 and Unit 2 resulted in 7 or more days of lost production by Merrill's estimate. If the estimate of 5 days of lost production due to Ike are correct, MEMC still has 2 or 3 more days of buffer to reach the high end of the forecast range for 3Q, making the overall range still reasonable.

Discount to peers, sell-off is a good entry point
The impact of the storm is a short term, risk from weakness in the semi wafer market is well known and MEMC is back to building in a buffer for normal execution risks. Firm's channel checks suggest solar demand and pricing should remain strong enough to make their 2009 estimates very achievable. MEMC now trades for 6x 2009 EPS estimate versus peers REC and Wacker Chemie at 10x and 16x consensus EPS estimates, with all three facing the same issues, excluding the hurricane, but with MEMC a lower cost, higher margin, pure play. As a result, MEMC should be bought for a recovery to a multiple at least at the average of its peers of 14x 2009 EPS estimate for a $70 price target.

Reiterates Buy.

Notablecalls: The decline in WFR stock has become ridiculous. Here you have a company that can't meet demand. Sure, they have had execution problems but it goes to show how difficult it is to produce poly meaning the chatter of more capacity coming online in the n-t is bollocks. If they have problems, the chinese will surely have even more problems.

Trading 6x 2009 EPS WFR looks like a springed coil ready to burst higher on ANYTHING positive.


dcxavier said...

I have no opinion on a trading basis, but long term WFR, like POT, trades with energy. If oil drops back to $60-$80 and stays there, solar isn't going to be cost effective and the demand will go away.

These same brokerages were emphasizing 2001 forward EPS based on backlogs for tech stocks when the market was falling apart in 2000. We know how that turned out.

ShortBus said...

dcxavier -

I would say that you have not been following the solar sector close enough from a technical perspective.

Solar efficiency conversion has improved dramatically, and the cost of producing the solar technology has also come down dramatically.

The old argument that Solar is not cost effective at anything below $70 is not true any more. It is almost to the point where it is cost effective even without the subsidies.

I do not know what the current numbers are because they change so often.

dcxavier said...

Thank you for your response, shortbus. The one thing I have stuck in my mind is that WFR's silicon wafer technology in particular isn't cost effective with historically priced oil, nat gas, etc. This probably isn't the forum for the discussion, I have a note to learn more and keep up better.