The stock had plunged from more than $80 in early 2008 to just $4 by the time I predicted shares would double (back to $8). I noted that its semiconductor and solar power businesses appeared to be close to bottoming out, and that the picture for each division would soon improve.
It's that part, "close to bottoming," that really tripped me. This stock didn't double in value -- it actually lost half of its value. Simply put, the company had one more wave of weak quarterly results to deliver to investors. My call for a turnaround was quite premature.
Well, the tide eventually turned, and shares are on the mend. I still see this stock going to $8.
How could a stock go from being loathed to loved in such short order? Five key factors have helped change sentiment:
- The semiconductor wafer business has clearly turned the corner, thanks to industry-wide capacity cuts that brought supply down to the level of demand.
- The company's solar division continues to ink new and profitable contracts, despite fears that the multi-year swoon for solar stocks would drag down WFR's SunEdison division as well.
- A recently-hired new chief financial officer has done a much better job of explaining the company's admittedly complex capital allocation structure, and has done a better job of explaining how the company will be able to deliver increasingly robust cash flow.
- Fourth-quarter results exceeded top and bottom-line forecasts, which is a clear break from past trends of quarterly misses.
- MEMC is now in a much stronger financial position.
Of course, we're still talking about a stock that has tanked from $80 to $5 in the past five years, so MEMC is hardly the picture of health. For example, the semiconductor wafer division will benefit from firmer pricing, but gross margins are still unlikely to exceed 5% this year. In the middle of the last decade, this division had 50% gross margins. Simply returning to 10% margins by 2014 or 2015 would materially boost this stock. Even with its current paltry gross margins, analysts at UBS say the division is worth $2.80 a share, while analysts at Credit Suisse page fair value for the division at $4 a share.
How realistic is it to expect 10% gross margins in this division? Well, management says that any incremental revenue beyond the current base of $900 million will yield 50% gross margins. Keep in mind this division routinely generated $2 billion in annual sales in the middle of the last decade. Assuming $1.3 billion in revenue by mid-decade, this division should again throw off decent profits.
Yet it's the fast-growing solar division that is really coming into focus for investors. Rather than selling solar panels -- a dismal business if there ever was one -- MEMC decided to go upstream and use its panels as part of broader power-plant developments. The company currently has a backlog of 927 Megawatts (MW) for plants to be built through the end of 2014.
Many questioned this wisdom of a semiconductor wafer maker entering into solar power plant construction market, and the move bled huge amounts of cash from the balance sheet. But the outlook is starting to really strengthen for the division. Management is expected to spend a great deal of time with analysts on March 13, walking through the growth in backlog at this division and what that means for future cash flow generation.
One of the reasons this stock plunged last summer was because of growing concerns that MEMC would hit a rough patch on its balance sheet and perhaps run out of funds. A series of recent steps have shored up the balance sheet, and the company now has $573 million in cash on hand, and total liquidity exceeding $800 million. Long-term debt of $2.4 billion is still a concern, but now looks increasingly manageable.
Analysts are becoming increasingly bullish on the stock. Credit Suisse and Lazard recently raised their price targets to $8, representing more than 50% upside from current levels.
Risks to Consider: MEMC will need to deliver several more solid quarters and show signs that the semiconductor business is restrengthening before investors push this stock up toward the $8 mark.
Action to Take --> Despite the strong rebound in shares, investors can still profit from MEMC's rebound. I strongly suggest investors to listen to the company's March 13 webcast, as it will help investors make sense of an admittedly complex business model. Management paid the price on the past for this complexity, though its bold moves are now starting to pay off.