MEMC Electronic Materials Inc' WFR

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MEMC Electronic Materials Inc. (WFR)

• Brandon Lee and David Light
• March 11, 2008

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Outline

• What is a Wafer?
• Industry Outlook
• Company Overview
• Competitors
• Valuation Portfolio Fit
• Recommendation

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What is a wafer?

• A thin slice of semiconductor material used to
  make microchips and other micro devices
• All the processes of a micro device are conducted
  on a wafer
• Come in different sizes (1 inch to 12 inches in
  diameter) and in different thicknesses
• Wafer sizes have increased device performance and
  reduced production costs

A silicon wafer
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Outline

• What is a Wafer?
• Industry Outlook
• Company Overview
• Competitors
• Valuation Portfolio Fit
• Recommendation

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Wafer Industry Outlook

• The introduction of electronics and computer
  technology into our daily lives is growing at an
  exponential rate.
• One of the few markets that can improve device
  performance while sustaining steady revenue
  growth and reducing production costs.
• There is a trend towards developing larger wafers
  (200mm and 300mm)
• Over the past 10 years, the wafer industry has
  consolidated and only four companies have 10 or
  more of the market share
• Highly correlated with semiconductor industry

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Wafer Industry vs. Semiconductor Industry
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Wafer Market Size and Growth
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Outline

• What is a Wafer?
• Industry Outlook
• Company Overview
• Competitors
• Valuation Portfolio Fit
• Recommendation

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Company Overview

• MEMC produces silicon wafers for the
  semiconductor and solar power industry globally
• Based in St. Peters, MO
• Produces both semiconductor wafers and solar
  wafers ranging in size from 100mm (4 inches) to
  300mm (12 inches)
• Strategy Continuous improvement of technology,
  market share, and profits.
• NYSE Ticker WFR

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Expanding into Solar Market

• Began producing solar wafers in 2007
• Currently outsources production
• Bringing production in house in 2009
• Improved margins
• Has contracts signed worth 15-18BN over the next
  10 years
• Has current capacity for one more contract over
  that time worth another 2-3BN
• Solar represents a 30 annual growth market

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Company History

• Founded in 1953
• Pioneer in wafer development leader in
  supplying semiconductor wafers for over 50 years
• 1995 IPO on NYSE under the ticker WFR
• 2006 Announced the signing of 7-9 billion in
  contracts to deliver solar wafers (an 18 billion
  market at the time)
• 2008 One of four wafer companies with 10 or
  more of the market share.

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Management Team

• Nabeel Gareeb President, CEO, and member of
  Board of Directors
• Joined MEMC in April 2002
• Holds a Masters of Science in Electrical
  Management and a Bachelors of Science in
  Electrical Engineering
• John Marren Chairman of Board of Directors
• Has been with MEMC since November 2001
• Partner of Texas Pacific Group
• Board of Directors of Conexant Systems, Inc. and
  ON Semiconductor Corporation
• Dr. Shaker Sadasivam Senior VP, Research and
  Development
• Has been with MEMC since 1993, serving many
  different roles
• Holds a Doctorates and Masters in Chemical
  Engineering and a Masters in Business
  Administration

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Statistics

• Trailing P/E 20.83x
• Forward P/E 14.20x
• ROA 22.83
• ROE 51.62
• Debt to Equity Ratio .015
• Current Ratio 3.578

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Investment Thesis

• Great Visibility
• Strong Long-Term Solar Growth
• Good Pricing Power (12-18 months)
• High barriers to entry in Polysilicon
• Very efficient operator
• Signed Contracts not yet reflected in stock price

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Outline

• What is a Wafer?
• Industry Outlook
• Company Overview
• Competitors
• Valuation Portfolio Fit
• Recommendation

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Competitors
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Porters Five Forces

• Barriers to Entry Highly specialized and
  technical industry with very few competitors and
  high barriers to entry. 3 years to build a
  polysilicon plant, 18 months to build a wafer
  plant.
• Bargaining Power of Buyers Low. There used to be
  a lot of wafer companies, but consolidation has
  led to fewer competitors.
• Only four companies with 10 or more of market
  share.
• Bargaining Power of Suppliers Low. MEMC
  manufactures their own polysilicon, the major raw
  material used in making wafers.
• Threat of Substitutes Somewhat high. Anyone
  making high-quality wafers is a threat to take
  share and increase rivalry.
• Rivalry Fewer and fewer competitors in recent
  years.

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Outline

• What is a Wafer?
• Industry Outlook
• Company Overview
• Competitors
• Valuation Portfolio Fit
• Recommendation

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WFR vs. SP 500 (1 Year)
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WFR vs. SP 500 vs. SP Semiconductors Index (5
Year)
Source 2007 Annual Report
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Revenue Projection
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DCF Assumptions

• WACC 13.95
• Long-term growth 5
• Beta 1.66

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DCF Valuation

• Current Price 71.93
• DCF Value 87.10
• Intrinsic Value 78.40-95.82
• Estimated Total Return 21

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DCF Assumptions
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Portfolio Fit
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Outline

• What is a Wafer?
• Industry Outlook
• Company Overview
• Competitors
• Valuation Portfolio Fit
• Recommendation

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Recommendation

• BUY 200 shares of WFR at market price
• Approximate cost 14,822.00
• Increases total number of holdings to 13.
• WFR will represent approximately 4.12 upon
  purchase
• WFR will expose the RCMP portfolio to the
  semiconductor industry and alternative energy