You can't blame all of the vast stock sell-offs in 2008 and early 2009 on the lousy economy. Sometimes, share prices plunged simply due to management ineptitude. MEMC Electronic Materials (NYSE: WFR) was a perennially respected leading supplier of those big disks -- known as wafers -- for roughly four decades. And investors had no problem paying $60, $70 or even $80 for its shares.
But management simply dropped the ball. They sought to replicate their dominant position in semiconductors in the burgeoning world of solar power. After all, solar panels are made from fairly similar wafer-style technology. Trouble is, MEMC's management neglected its crown jewel (semiconductors) and paid too much attention to the solar biz. The net result: rivals stole major market share, and MEMC quickly moved from industry leader to industry laggard. Shares plunged from $80 two years ago to as low as $10 and still trade for less than $15.
Behind the scenes, MEMC is getting back on track, thanks to new management. In recent quarters, the semiconductor segment has received the attention it needed, and the company is now re-taking market share that was lost to rivals. An increase in overall industry demand and firming prices are setting the stage for a nice recovery in the business, which should see a revenue boost of +60% to +70% this year, according to management.
Equally important, profit margins are now quickly rebounding. In the most recent quarter, gross margins rose to about 15% and should move back into the 20s in the next few quarters, thanks to rising factory utilization rates and recent price increases. (It helps that privately-held Asian rivals Shin-Etsu and Siltronic are also raising prices, signaling that the days of price wars for wafers are now over). Profits should build in this segment throughout this year as a result. Analysts think the wafer division could be worth as much as $11 a share -- still just a fraction of what the business was worth when it held higher market share and had far better margins back in 2007.
MEMC also carries about $2.50 a share in net cash on its balance sheet. This brings us to a total estimated value of about $13.50, close to current share prices. This means the solar power segment of MEMC is being assigned virtually no value by investors. Blame it on investor myopia. MEMC has been aggressively investing in this business, including a December, 2009 purchase of SunEdison, one of the world's largest builders and operators of solar power plants, for 300 million dollars.
To be sure, MEMC has morphed its business model in this segment -- from a wafer supplier to a plant operator. This has left analysts scratching their heads in search of an appropriate valuation. As this segment builds out, it will entail a range of upfront costs, which obscures the view of potential profits. But as the long-term view comes into focus, this division could throw off between 50 cents and a dollar in annual profits per share.
MEMC recently got a boost when it was awarded, by the government of Italy, its largest ever contract for a solar plant installation. That contract should enable MEMC to handily exceed its 2010 goal of 100 Megawatts (MW) of new plant construction. Management expects to make additional announcements during the next few months, which should help beat back detractors expecting a severe slowdown in the solar field.
Looking ahead to next year, the company thinks it can sign contracts equating to 200 MW of power generation. That may seem a tall order, but most analysts think global demand for solar power in 2011 will exceed 10 Gigawatts (or 10,000 MW).
So, what's the solar business worth? At a minimum, MEMC has invested more than $700 million -- or about $3 a share. But if it can generate $0.50 to $1 a share in profit, then the segment could be worth closer to $5 or $10 a share. Tack on the value of the semiconductor business and the company's cash position, and shares of MEMC could handily move back north of $20. That's still a far cry from the $80 fetched in 2007, but still represents an upside of about +50% form current levels.