We are maintaining our Neutral recommendation on MEMC Electronic Materials Inc. (WFR) with a target price of $6.25. MEMC’s strong segmental growth in its second quarter and momentum in its solar projects were shaken by the uncertainty in polysilicon pricing and overcapacity in the solar market.
MEMC is the leading producer of silicon wafers for the semiconductor industry, operating manufacturing facilities in Europe, Japan, Malaysia, South Korea, Taiwan and the United States. Its customers include all major semiconductor device manufacturers in the world be it in memory, microprocessor, ASIC, or foundry segments.
MEMC runs its business under three segments, namely Semiconductor Materials, Solar Materials and Solar Energy. The Solar Energy segment consists of SunEdison’s operations, which was acquired in November 2009.
MEMC internally produces polysilicon, the raw material used to make wafers, which gives it a competitive advantage over its peers. However, this advantage is not enough to offset the pressure on wafer prices, which forced it to amend one of its long-term wafer supply agreements. More recently, Suntech Power Holding Co. Ltd. (STP) terminated its long-term contract with MEMC due to the constant price declines.
On the other hand, MEMC is seeing a solid trend in its solar business. Currently, MEMC is engaged in developing its solar energy projects mostly in North America and Europe. The company has already built a solar plant in Italy, Rovigo, which happens to be the largest photovoltaic power plant in the region. We think that strong business ties with the European region will allow the company to capitalize on the solar prospects in Germany and Italy. MEMC is also building its position in the Chinese solar market.
The solar industry remains highly dependent on subsidy or tariff programs for the overwhelming part of installations. Any significant reduction in subsidy programs, will lead to earnings pressure on the company’s solar-wafer and solar installation business, since prices have to be kept low in order to encourage organizations to purchase. Till now, Italy, Germany and U.K. have reduced their tariff rates considerably. This could affect MEMC’s solar business.
Moreover, another reason for the concern is that the solar market has stepped into the oversupply zone. Though market sources are expecting a demand surge in China, some believe that it will not be sufficient to work down the existing inventory levels.
The ongoing overcapacity situation in the solar market will continue to impact pricing and profitability. Hence, we believe it will be hard for MEMC to significantly improve its earnings in the near to intermediate term.
Currently, MEMC has a Zacks #3 Rank, implying a short-term Hold recommendation.
