MEMC Electronic Materials (NYSE: WFR) recently proposed a company name change to SunEdison, to be effective post-May, for a good reason. Even though it is a company essentially in the semiconductor equipment/Information Technology business, its solar business is what makes this $5 stock a great risk-reward opportunity. There are several business and market drivers that will benefit MEMC Electronic Materials in the next two years.
Key Business and Market Catalysts
The solar industry has suffered greatly from the problem of oversupply of solar modules and therefore decreasing prices. However, reduced prices are now helping this industry with strong growth prospects, especially in the emerging markets. The International Finance Corporation projects that there is an annual opportunity of $40 billion for companies in the solar industry – there is a demand for energy access at the household level. The market for solar pumps (these are used for farming) in areas where there is lack of electricity access, is close to $200 billion. In recent times, MEMC has shown an aggressive approach in gaining inroads into the emerging market business. For example, they entered India in 2010 and have grown into other Asian countries such as Thailand as well. The high energy access demand for irrigation, industrial and household purposes in the emerging markets will greatly benefit MEMC’s industry position in these countries.
Industry forecasts in many of the developing and developed areas show a tremendous growth because of increasing energy demand and lack of electrification. Take a look at the combined report below.
In developed areas like North America as well, MEMC expects big opportunities in the next few years. It sees a 400 mega-watt annual opportunity by 2015 in this region and expects to gain a solid 12% market share in its distributed generation business in the next two years, according to a recent presentation on Capital Markets Day.
MEMC’s joint ventures with companies like Samsung have fueled innovation within the company and helped it gain significant brand recognition in the semiconductor industry.
MEMC has heavily focused on reducing its cost of capital and has shown tremendous progress in recent quarters. Its cost of capital has declined significantly.
In its recent investor presentation, MEMC disclosed that it is targeting a 12% growth rate in its distribution generation segment, on top of the impressive 25% CAGR it enjoys in the North American region. The company also plans to expand its utility segment by way of mergers or acquisitions.
In the past two years, MEMC has been able to grow its pipeline of contracts, and has bagged some important contracts in growing markets such as Brazil, Mexico, Bulgaria, Jordan and Chile. The company also disclosed that in 2013, it is hoping to close some big deals in Europe as well.
Apart from solar modules, MEMC also services the semiconductor industry. The company has been gaining market share since 2009 in spite of reports of weaker than expected PC shipments. The biggest drawback in this business segment lately has been that the pricing has been lower than anticipated. However, the company expects that the semiconductor industry will recover in the second half of this year, which they disclosed during their earnings call.
Analysts that cover MEMC Electronics have annual earnings estimates $0.21 and $.49, respectively in 2013 and 2014. They also expect the operating revenue to continue to increase in the next year as well.
With Price-To-Sales ratio of 0.45 (one of the lowest in the Semiconductors industry), MEMC seems to be valued at a discount. Its Price/Book is 1.9 and Price/Sales is 0.43, compared to industry averages of 2.78 and 2.89, respectively.
MEMC's Interest Coverage ratio of 1.98 and Quick Ratio of 1.07 indicates that its debt repayment capabilities are sound.
The percentage of outstanding MEMC stocks that are owned by institutional investors is a solid 79%, with 222 financial institution holding the MEMC stock.
MEMC is highly focused on the fast-growing North American market and it is already the market share leader in North America in the areas of solar installation, utility services and distributed generation. Its biggest competitors in the solar space include SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), LDK Solar (NYSE: LDK).
SunPower designs and manufactures solar electric systems for residential, commercial, and utility-scale power plant customers worldwide. Its sales were badly affected due to oversupply in solar modules, partly due to Chinese players who were able to produce high capacity solar modules at a very low cost. MEMC will continue to face stiff competition from SunPower's operations in the utility segment, especially in the North American region (sales are 70% in this region).
First Solar manufactures solar panels and constructs solar power plants; it has been going through heavy restructuring lately and have decided to shift its focus away from solar rooftops market which is in fact a growing market for all developing countries that MEMC operates in.
LDK Solar directly competes with MEMC in the business of solar wafers, modules and solar farm projects. However, its industry position has weakened lately due to a negative trailing-twelve-months profit margin of -92.93% and a negative revenue growth of -57%.
Of all these companies, MEMC is the only solar developer that has its operations in all possible business segments in the solar industry.
MEMC does face risks such as sovereign or political risks (because it operates in several different countries), continued lower pricing of solar modules, dependence on government subsidies and increased operating costs due to capital intensive projects. That said, the growth prospects in the solar space, the company's earnings expectations as well as its positive outlook for the coming years make the stock a good risk-reward bet.
MEMC is currently trading around $5, closer towards its 52-week high of $5.70, and like most low-priced stocks in this market, it has been extremely volatile lately: 5% swings either way are not uncommon for this stock. If you are a patient investor who does not mind the volatility, MEMC Electronic Materials (or SunEdison soon) is a very good low-priced stock that has low valuation and high growth forecasts in the coming quarters.