MEMC Electronic Materials (NYSE Ticker: WFR) Greg Bruno Tim Schmelzle Tom Wang Antti Zhang Tuesday, October 12, 2010

MEMC Electronic Materials MEMC Electronic Materials

(NYSE Ticker: WFR)(NYSE Ticker: WFR)

Greg BrunoTim Schmelzle

Tom Wang Antti Zhang

Tuesday, October 12, 2010

Presentation OutlinePresentation OutlineWFR Stock Purchase HistoryCompany OverviewIndustry OutlookHistorical & Recent Stock PerformanceAcquisition ActivitiesSWOT Analysis & Porter’s Five ForcesDuPont AnalysisCompetitor AnalysisFinancial Statement AnalysisFinancial Projections (DCF Valuations)Recommendation

WFR Stock Purchase WFR Stock Purchase HistoryHistoryMarch 2008: 200 shares were bought @

$78.15December 2008: 400 shares were bought @

$14.43Cost

basis=($78.15*200+$14.43*400)/(400+200) =$35.67 per share

October 8, 2010 Closing Price: $13.09Market Value of 600 shares: $7,854% Portfolio Holding = 2.39%Unrealized Loss=$35.67*600-$7,584= $13,548

or 63.3%

Company OverviewCompany OverviewMEMC, based in St. Peters, Missouri, is a

global leader in the manufacture and sale of wafers and related products to the semiconductor and solar industries.

Founded in 1959Employees 4,800 people worldwide2009: Recorded Sales of $1.2 billionStocks traded on New York Stock

Exchange and is included in the S&P 500 index

Data provided by www.memc.com as of October 10, 2010

Company Overview Company Overview

MEMC operates three business units:Semiconductor Materials ($7 billion market size)

◦ Manufactures silicon wafers which are used in building semiconductor devices

Solar Materials ($10 billion market size)◦ Manufactures silicon wafers which are used

in building solar cells and solar modulesSolar Energy ($39 billion market size)

◦ Sun Edison, MEMC’s subsidiary develops, finances, installs and operates solar power plants for its customers

Information provided by www.memc.com as of October 10, 2010

Global Sales and Global Sales and ManufacturingManufacturing

Image provided by www.memc.com as of October 10, 2010

What is a wafer?What is a wafer?

A thin slice of semiconductor material, such as silicon crystal, used in the fabrication of integrated circuits and other micro devices.

A solar wafer is a circular solar cell made from the entire wafer.

Wafers are formed of highly pure, nearly defect-free single crystalline material.

Wafers are the foundations upon which semiconductor and solar cells are built.



Industry OutlookIndustry Outlook Recent growth in the industry is not sustainable and is

attributed to a rebounding effect from the recent economic downturn. Growth for the remainder of 2010 is expected to continue diminishing from it’s present 27% to 6.3%, by 2011 and remain at 6.3% for the year. Growth is then expected to fall to the 4-5% range for the next several years.

Core growth in this industry is expected to come from cell phone sales and non-retail avenues, primarily commercial solar development and military use.

Consumer electronics outside of the cell phone industry is viewed as a mature sector with little growth.

Thin film technology promises to displace wafer technology within the solar industry at increasing rates and is expected by many to render wafer technology obsolete in time.Data provided by www.sia-

online.org as of October 10, 2010

Industry Revenue Industry Revenue

Chart produced by Yahoo Financewww.yahoo.com

Historical Stock Historical Stock PerformancePerformance

Chart produced by Yahoo Finance, October 9, 2010http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=

Historical PerformanceHistorical Performance


Recent Stock PerformanceRecent Stock Performance


Recent Stock PerformanceRecent Stock Performance


Acquisition ActivitiesAcquisition ActivitiesNovember 23, 2009 MEMC completed acquisition

of privately held Sun Edison, a developer of solar power projects and North America’s largest solar energy service provider. (Paid with $314 million, 70% cash, 30% MEMC stocks)

July 2, 2010 MEMC completed acquisition of privately held Solaicx. (Paid with $66 million cash, and plus $10 cash equivalent of investment in Solaicx.) The acquisition expected to be accretive to earnings per share in 2011.

Based on the MEMC’s recent frequent acquisition activities, we expect more acquisition activities will be initiated in the near future.

Information provided by www.sunedison.com & www.memc.com as of October 10, 2010

SWOT AnalysisSWOT Analysis Strengths

◦ Large Cash Reserves◦ Production of polysilicon◦ Internal sales to SunEdison

Weaknesses◦ Overcapitalized (Too much Capacity)◦ Recent investments in old technology◦ Competitors located in Japan / China◦ Several highly diversified competitors◦ Very low pricing power

SWOT AnalysisSWOT Analysis Opportunities

◦ Further diversification◦ Reductions to COGS◦ Acquisition into new technology◦ Increased adoption of SunEdison Power Plants

Threats◦ Slow/no growth economy◦ Fiscal Austerity◦ Protectionism◦ Wide adoption of different technology◦ IRS audit / Lawsuits

Porter’s Five ForcesPorter’s Five Forces Bargaining Power Suppliers – Low

◦ MEMC produces Polysilicon◦ Polysilicon price is market driven

Threat of New Entrants – High◦ Increased demand for existing fuels◦ Competitors patents / innovations◦ Semi business is already commoditized

Barriers to Entry – Medium High◦ High fixed capital costs / burn rate to start◦ Need for constant R&D and innovation◦ Govt subsidies and investor funds are available

Porter’s Five ForcesPorter’s Five Forces Bargaining Power of Buyers – Very High

◦ Short contracts for Semi-wafers (3-6 months)◦ MEMC is largely a price taker in Semi-wafers◦ Clean energy is a “like” not “need,” or “want”◦ Long term supply contracts for Solar wafers

Three out of four have since been renegotiated

Industry Rivalry – Very High◦ Multiple wafer companies competing on price◦ Semi-wafers are highly commoditized◦ Competition for subsidized projects◦ Competition for adoption by competing technologies

Semi-Materials and Solar-Materials Industry seems unattractive

DuPont AnalysisDuPont AnalysisProfit margin gets squeezed

during slowdown due to high fixed costs

DuPont Analysis

2009 2008 2007

Profit Margin -5.87% 19.33% 42.99%

Asset Turnover 32.63% 68.26% 66.56%

Equity Multiplyer 1.64 1.41 1.42

ROE -0.03 0.19 0.41

Data provided by Capital IQ as of September 17, 2010

Competitor AnalysisCompetitor Analysis Semiconductor Wafers

◦ Shin−Etsu Handotai Highest Market share at 32.4% Highly diversified Japanese company

◦ Sumco 29% Market Share

156mm Solar Wafers◦ LDK Solar

1.23B Market Cap; 1.10B 2009 Revenue◦ ReneSola

1.13B Market Cap; 510M 2009 Revenue Solar Energy Production

◦ First Solar Inc. 11.77B Market Cap; 2.07B 2009 Revenue Thin Film Solar

◦ SunPower Corp. 1.3B Market Cap; 1.52B 2009 Revenue

December 31, 2009 10-KYahoo Finance: Tickers LDK, SOL, FSLR, SPWRA respectively

Special MentionSpecial MentionHolding $285 million in Goodwill

from the purchase of SunEdison we value near $0

December 31, 2009 10-K Balance Sheet provided by EDGARS Online dated March 1, 2010

Key Income FactorsKey Income FactorsImportance Low

High

December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010

MEMC Sells a commodityMEMC Sells a commoditySales and cost containment of COGS are primary

drivers of profit. COGS are not driven directly by sales.

Sales

COGSF.A. Turnover Ratio: 1.0 3.6 3.4 2.9 2.4 2.8 2.7 2.1 .9


MEMC Cost ControlMEMC Cost Control“The larger 300 mm wafers enable lower production costs,

reducing the costs per individual component by approximately 30 percent.”

Nanotechnology interview with Craig Barrett, Intel CEO, June 15, 2004

http://www.azonano.com/news.asp?newsID=180

Sales

COGS

“MEMC Moves to Full-Scale 300mm Wafer Production”

BUSINESS WIREJan. 10, 2002 http://www.highbeam.com/doc/1G1-81567480.html


In 2002 MEMC deployed In 2002 MEMC deployed 300mm wafer technology300mm wafer technology

Sales

COGS

Adjusted: 2002 25%2003 25%2004 15%2005 5%

5.5% Historical growth patternDecember 31, 2009 10-K Income

Statement provided by EDGARS Online dated March 1, 2010

COGSCOGS

2005

2006

2007

2008

2009

Sales 1,107.4 1,540.6 1,921.8 2,004.5 1,163.6

F.A. T/O

Ratio 2.4 2.8 2.7 2.1 0.9

Imputed F.A.

461.42

550.21

711.78

954.52

1,292.89

Remove

Sun’s F.A.

-332

Net F.A. 461.42 550.21 711.78 954.52 960.89

Growth of F.A. has slowed to .66%, effectively 0%

ANOVA Results: R2 = 97.5% F-Stat = 58 T-Stat = 13.7Sales and ratios provided by

Capital IQ as of September 17, 2010

MEMC Cost ControlMEMC Cost ControlMEMC is completing the closure of their two largest manufacturing facilities 33%1by square footage compared to the total company to Malaysia. We estimate it will be able to produce 50% of the company’s total output at a 20% cost reduction. This effect has been incorporated into our model at diminishing returns over the next 10 years.

1MEMC 10-K (.pdf version) dated December 31, 2009: p21

DCF Analysis-Revenue Estimate

Sales Estimate is based on industrial analysis and comparison analysis

We separate SunEddison and MEMC’s traditional business-Wafer

COGS is calculated as a function of MEMC’s cost and SunEdison’s cost.

The COGS Margin is declining. Implying their restructuring effect

DCF Analysis-WACCCost of Debt

◦ 3 Level Rating Float: BB,BBB,A-◦ Weighted average by comparable analysis◦ 10 years US note

Cost of Equity◦ Beta

Unlevered Industrial Beta(NYU Report) Historical Beta (Yahoo Finance)

◦ Risk Premium Market Return (Bloomberg Estimate with

Adjustment) 10 years US note

◦ CPAM: WACC:15.28%

Float rate from Standard & Poor

DCF Monte Carlo Stimulation

By Crystal Ball

RecommendationRecommendationThe stock is currently trading at $13.09. Our intrinsic value for WFR is $14.14. We therefore recommend a modified holding strategy. Sell the original 200 shares at $13.09 and repurchase them after the waiting period to capture the unrealized loss. Estimated cash to fund would be approximately $3,900 while maintaining our position.

Documents

MEMC Electronic Materials (NYSE Ticker: WFR) Greg Bruno Tim Schmelzle Tom Wang Antti Zhang Tuesday, October 12, 2010