Credit Suisse is making an interesting call on MEMC Electronic (NYSE:WFR) upgrading the name to Outperform from Neutral with a whopping $19.50 price target (prev. $17).Bottom line. CSFB is raising their CY10 EPS from 42c to 71c; firm's CY11 EPS now at $1.49. They think the semi business is worth ~$11, and with $4.5 of cash, the implied solar valuation is negative. Prior trough book multiple was 1.1x (implies ~$11 is downside). They think the solar business is worth at least $4/share – risk/reward attractive.
Semi business entering a sweet spot. Semi wafer supply and demand is tightening driving price increases Q1 and in Q2. Semi capex is ramping, and should help demand in 2H10 and 2011. MEMC has increased market share by 2x LTM. Semi revenues in CY10 are higher than most investors’ expectations. Expect semi business to earn ~$1.09 in CY11; CSFB values it at $11/share.
CSFB thinks the semi business is generally much larger than what most investors expected in 2010. They think MEMC’s semi wafer shipments (measured in Millions of Square Inches or MSI) will grow nearly 60% y/y in 2010, well above industry MSI shipment growth rates slightly under 40% as MEMC is gaining market share in semis.
MEMC lost a significant amount of market share from 2005-08 in the semi business. This was primarily because the company focused too much on its solar poly business, which resulted in poor customer service, missed deliveries and a lack of focus in the semi business. MEMC’s new management team in the last year has significantly turned around the semi business. Firm thinks this is absolutely the right thing to do in the long run – the semi business has a legacy that spans beyond 30 years, does not depend upon subsidies, has strong long term unit growth trends and is much more consolidated than the solar wafer business.
Solar business fears overblown. While CSFB thinks the Sun Edison acquisition was the right move given US is a high growth end market, investors are concerned on cash flows and balance sheet impact. MEMC will use its balance sheet to drive construction finance of these projects, however, the projects are fully financed through buy-down financing – MEMC guided for positive FCF in 2010. The project debt is non-recourse. Sun Edison business was acquired for 80c/share, they value solar wafer business at ~$3.3 – solar total is over $4/share.
CSFB notes that anecdotally, they hear US installers complain that they do not receive sufficient panels to meet demand at lower price points. They think there should be some demand elasticity in the US at <$1.60/watt but suppliers today can clear panels in Germany at >$1.80/watt. Suppliers intentionally are diverting panels to Germany as there is an added worry the German government will cut subsidies soon. They think the German market will be impacted by a decline in subsidies – which the firm thinks will likely cause panel prices to decline – which in turn they think will help volumes in the US business.
Valuation. MEMC stock sold off 15% yesterday following a well attended analyst day. Besides general unease about Sun Edison acquisition, Investors worried about company’s breakeven EPS guidance for Q1 which missed street consensus at 9c (although CSFB says they thought full-year guidance of 70-80c, which included 10c of non-recurring charges was better than feared). Concerns appear overblown at current valuations, see favorable risk/reward with $8 upside to their price target and $2 downside if stock retrenches to 1x book.
Notablecalls: One of the main reasons why this call warrants attention is that Credit Suisse's Solar Energy team have never been fans of WFR in the past. They have been Neutral-rated on the name since the time the stock was in the $60-$70's back in 2007. They kept their cool all this time.
Until today.
The stock got crushed (-15%) following not-so-bad guidance which kind of looks like a capitulation move. The general market weakness surely helped.
So, today CSFB upgrades the stock with a whopping price target of $19.50 saying, hey guys, it's not so bad. The Semi business is humming and Solar may be getting better. Note that HSBC is upgrading the Solars this morning saying after Germany announced plans to cut solar incentives, but reported blockbuster shipments during the third quarter, have excited many analysts as the U.S. solar market could show strong growth this year.
This is bound to surprise a lot of people.
If we get a some kind of a stealthy rally in the market today (and I suspect we may get one) this one's going higher.
I'm thinking of $12.50+ as a prudent target under this scenario.
Actionable Call Alert!
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