Tuesday, September 08, 2009

MEMC Electronic (NYSE:WFR): Upgraded to Outperform at FBR Capital

FBR Capital is upgrading MEMC Electronic (NYSE:WFR) to Outperform from Market Perform and raising their price target to $22 (prev. $16).

Firm notes their checks last week in Taiwan indicated that MEMC Electronic Materials not only has been able to gain considerable market share in the solar side, it also has been able to regain some of the semi market share lost a few years ago in Korea and Taiwan. Yes, such share gains have come at the expense of lower margins (versus historical trends, especially following past recoveries in the semiconductor industry). However, FBR Capital believes the gains are already baked into expectations and share price, as the company, in their view, set guidance low enough to be able to execute successfully. Moving forward, and consistent with FBR's solar industry thesis, they expect the overall GM to peak in the 30s, nowhere near the 50%-plus when poly was sold into the spot market at exuberant prices. However, they believe the new management "gets it" that both solar and semiconductor industries are commodity-type industries, and thus the inflated GM profiles of a few years ago will not happen again—at least, the firm does not expect that. Thus, given the higher semi and solar wafer shipments, because of QOQ increase in end-market demand along with material share gains and some margin improvement, and because of higher unit shipment, they are increasing their CY09 revenue/EPS estimates from $1,177M/$0.15 to $1,204M/$0.20, while CY10 estimates also increase from $1,691M/$1.02 to $1,700M/$1.07. Given the higher estimates, as well as increased confidence that share gains will help MEMC to grow faster than the industry average, the firm is also raising their rating from Market Perform to Outperform and increasing their price target from $16 to $22, or 2x EV/sales and 8x EV/EBITDA, versus the peer group (GCL, Shin-Etsu, Sumco, Tokuyama, Wacker, and REC) average of 1.7x EV/sales and 6.0x EV/EBITDA.

- Semi market dynamics. As FBR noted in their TSM and UMC notes this morning, they believe that foundry wafer starts have continued to improve. Although some seasonality could impact the QOQ wafer starts during the 4Q–1Q period, thus adversely impacting raw semi wafer demand, they believe that MEMC has been able to regain some of the market share it lost a few years ago in Korea and Taiwan.

- Given the larger semi and solar wafer shipment, driven by end-market demand improvement along with market share gains, they believe MEMC is currently on track to exceed current consensus estimates for 3Q

Notablecalls: Expectations regarding WFR's n-t performance are low here and FBR's call will make a difference .

I think WFR can trade up 1pt today (towards $17.50 level) and possibly to $18 in the coming days.

I'd love to hear what JP Morgan Semi team will come up with (they have been very neg. on WFR lately).

1 comment:

notablecalls said...

JP Morgan Semi team says: Told you so!