Wafer Fat for MEMC (WFR)
A great quarter from MEMC Electronic Materials (WFR) was released last night ... and much more importantly, the company issued very optimistic guidance not only for this coming year but for the next 3-5 years. Eric Savitz, who first introduced me to this company a couple years ago, has a good summary of their earnings news here.
Though I remain somewhat nervous about the stock at these high prices (new almost-ten-year high today), I find it very difficult to consider selling any shares with the business plan management has laid out, and their excellent performance so far during their multi-year turnaround.
MEMC Electronic Materials sells polysilicon and silicon wafers to the semiconductor and solar energy industries -- and, as I've written about before, they've enjoyed almost perfect timing as sales and demand from the solar cell makers have picked up just as semiconductor demand overall has maybe dipped a little (though that really goes segment to segment, there are still plenty of strong semi manufacturers that are going full speed on production even as others work through an inventory glut).
The nervousness for investors lies in the fact that polysilicon production by all of the major manufacturers is going to increase significantly in the years ahead.
WFR management, through its projections that they will earn "over $3 this year" (a 20% bump over street estimates) and $5-7 a share in 2010-2012, is essentially saying that the increased production by both them and their major competitors will be absorbed by the market, and that margins won't suffer (in fact, they expect margins to improve). Some, including Citigroup, are intimating that this is just a ploy to boost the stock price, but I have no idea -- the price was already quite high, and valuation decent, yesterday.
With increasing analyst estimates rolling in, the forward PE should now be something like 15 or 16 -- which is a lot higher than it was when I bought shares a couple years ago as the turnaround started to bear fruit, but also a lot lower than most companies that are growing earnings at a 50% clip.
So although the company seems quite expensive to me, since my shares are now up more than 200%, as an outsider looking in I'd still have to consider it to be pretty fairly priced ... or even a bargain, if you believe the company's assessment of their future prospects.
And with margins continuing to grow during what has been a rough price war for AMD and Intel (two of the major silicon wafer customers) and a widely reported inventory problem in the semi space, I'm inclined to continue to give management the benefit of the doubt. They talk to their customers every day, and they're the ones signing these lucrative deals with solar companies and seeing evidence of a rebound in core semi wafer demand in 2007 (as I wrote back in October, they now have contracted for ten years of sales that equal well over half of their current sales rate just to the solar companies, which must give them a certain level of confidence).
It makes me nervous to hold a company that has appreciated this far, and in every other case where I've had a 200% gainer I've taken some profits on a portion of my position -- but with WFR, the earnings and growth potential have more than kept pace with the stock price while the multiple expansion has been relatively modest (and deserved, given their discount valuation before the turnaround began), and I don't want to walk away from the kind of projections they're making. This has certainly always been a cyclical business, but with the increasing number of products using semiconductor chips, and the steeply ramping demand for solar energy worldwide, I think the boom and bust cycle for semi demand may moderate and have less influence on WFR's results than in the past.
So, with somewhat nervous hands, I continue to hold.
disclosure: I do own WFR with no plans to buy or sell in the near future, and in the semi space I hold LEAP options on Cypress Semiconductor.
Though I remain somewhat nervous about the stock at these high prices (new almost-ten-year high today), I find it very difficult to consider selling any shares with the business plan management has laid out, and their excellent performance so far during their multi-year turnaround.
MEMC Electronic Materials sells polysilicon and silicon wafers to the semiconductor and solar energy industries -- and, as I've written about before, they've enjoyed almost perfect timing as sales and demand from the solar cell makers have picked up just as semiconductor demand overall has maybe dipped a little (though that really goes segment to segment, there are still plenty of strong semi manufacturers that are going full speed on production even as others work through an inventory glut).
The nervousness for investors lies in the fact that polysilicon production by all of the major manufacturers is going to increase significantly in the years ahead.
WFR management, through its projections that they will earn "over $3 this year" (a 20% bump over street estimates) and $5-7 a share in 2010-2012, is essentially saying that the increased production by both them and their major competitors will be absorbed by the market, and that margins won't suffer (in fact, they expect margins to improve). Some, including Citigroup, are intimating that this is just a ploy to boost the stock price, but I have no idea -- the price was already quite high, and valuation decent, yesterday.
With increasing analyst estimates rolling in, the forward PE should now be something like 15 or 16 -- which is a lot higher than it was when I bought shares a couple years ago as the turnaround started to bear fruit, but also a lot lower than most companies that are growing earnings at a 50% clip.
So although the company seems quite expensive to me, since my shares are now up more than 200%, as an outsider looking in I'd still have to consider it to be pretty fairly priced ... or even a bargain, if you believe the company's assessment of their future prospects.
And with margins continuing to grow during what has been a rough price war for AMD and Intel (two of the major silicon wafer customers) and a widely reported inventory problem in the semi space, I'm inclined to continue to give management the benefit of the doubt. They talk to their customers every day, and they're the ones signing these lucrative deals with solar companies and seeing evidence of a rebound in core semi wafer demand in 2007 (as I wrote back in October, they now have contracted for ten years of sales that equal well over half of their current sales rate just to the solar companies, which must give them a certain level of confidence).
It makes me nervous to hold a company that has appreciated this far, and in every other case where I've had a 200% gainer I've taken some profits on a portion of my position -- but with WFR, the earnings and growth potential have more than kept pace with the stock price while the multiple expansion has been relatively modest (and deserved, given their discount valuation before the turnaround began), and I don't want to walk away from the kind of projections they're making. This has certainly always been a cyclical business, but with the increasing number of products using semiconductor chips, and the steeply ramping demand for solar energy worldwide, I think the boom and bust cycle for semi demand may moderate and have less influence on WFR's results than in the past.
So, with somewhat nervous hands, I continue to hold.
disclosure: I do own WFR with no plans to buy or sell in the near future, and in the semi space I hold LEAP options on Cypress Semiconductor.
Labels: WFR
This article posted by One Guy @ 1/26/2007 10:29:00 AM 0 comments
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