Solar Market Keeps MEMC Hot

We reiterate our Buy on MEMC Electronic Materials, Inc. (WFR - Analyst Report) shares. The company produces the raw material wafers used by semiconductor manufacturers in the production of integrated circuits (ICs).

The decision to supply wafers to the solar industry is paying huge rewards as demand for polysilicon has raced ahead of supply. The solar business and the 300mm business are both high margin products. In each of the past two quarters operational issues at the Pasadena facility have had a negative impact on revenues and earnings. While the situation bears watching, we believe it may have created an attractive entry point for patient investors.

MEMC signed two solar wafer agreements worth between $8 billion and $9 billion over the next 10 years. The 300-mm wafer-size is the preferred wafer size headed into 2008. According to the Semiconductor Industry Association’s (SIA) annual forecast for 2007-2010, semiconductor sales are expected to grow at a compound annual growth rate (CAGR) of 7.7% to $321.5 billion in 2010.

MEMC trades at a multiple of 12.3x our estimate of 2009 earnings (P/E).We expect the firm to outgrow the general semiconductor industry. The firm’s $1 billion-plus balance sheet should pave the way for future share buybacks and potential mergers in the solar industry.

The company’s margins continue to improve. We feel the weaker TSMC capital expenditure numbers are not a sign of weakness, but the situation bears watching. We value the company based on the average of our P/E multiple (26.0x 2008 estimated EPS) and our two stage intrinsic model. The semiconductor group average P/E is between 25x-26x. We feel MEMR should trade at a premium to its peers. We have arrived at a target price of $105.00.

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