MEMC: Bright light in solar power

This innovative semiconductor stock faces strong prospects in the field.

By TheStockAdvisors Apr 22, 2013 10:10AM

Solar energy © Mick Roessler CorbisBy Angelo Zino, S&P Capital IQ analyst, The Outlook

Our latest Focus Stock is MEMC Electronic Materials (WFR), which carries S&P Capital IQ's highest investment recommendation of 5-STARS or "strong buy."

MEMC, which is changing its name to SunEdison, manufactures silicon wafers, which are used for the production of almost all semiconductor-based devices and develops and owns solar power generating facilities. We think earnings will grow at an annual compounded growth rate of more than 40% over the next three years aided by sequential margin expansion, as volume rises and cost cut benefits are recognized.

After two years of slowing sales growth, we think the semiconductor industry is near a cyclical trough. For MEMC, we see good execution and increased market share helping to lift profits in the future.

MEMC has improved its share of the wafer market in recent quarters. We believe sales of the company's higher margin "Epi" -- for epitaxial deposition -- wafers will witness particularly strong growth.

Following recent cost-cutting efforts, we think this business is now better aligned to take advantage of an industry recovery and will experience wider profit margins in the future. We also think MEMC may eventually spin off its semiconductor business, which could unlock significant value to shareholders.

MEMC's existing SunEdison business, which the company acquired in 2009, is a leading installer of photovoltaic solar energy equipment in North America with significant overseas sales as well.

SunEdison uses a unique financing model in which customers pay only for the electricity output generated by the solar system installed. That avoids the significant upfront capital costs of buying a system while also lowering power costs.

We note that current prices for photovoltaic solar panels, a business that MEMC does not engage in, are far below production costs.

We think MEMC has taken the right steps by expanding its SunEdison solar project business using an "asset-light" strategy. We believe this strategy, along with efficiency improvements, should result in lower system costs going forward.

We think the MEMC's solar energy business possesses a robust pipeline and backlog, but now has a better risk profile. Importantly, MEMC has significantly reduced its exposure to the Europe market, where demand growth is slowing.

MEMC makes use of innovative financing structures such as sale leasebacks in order to grow its solar systems business. It recently formed SunEdison Capital, a joint venture with Everstream, an investor in solar power infrastructure. The initial funding of this joint venture is $300 million, with the potential to grow substantially.

Also, we see new types of investment structures such as master limited partnerships and real estate investment trusts on the horizon for renewable energy products. We think MEMC will be one of the biggest beneficiaries of these developments.

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