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MEMC Electronic Materials (NYSE Ticker: WFR)

MEMC Electronic Materials (NYSE Ticker: WFR). Greg Bruno Tim Schmelzle Tom Wang Antti Zhang Tuesday, October 12, 2010. Presentation Outline. WFR Stock Purchase History Company Overview Industry Outlook Historical & Recent Stock Performance Acquisition Activities

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MEMC Electronic Materials (NYSE Ticker: WFR)

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  1. MEMC Electronic Materials (NYSE Ticker: WFR) Greg Bruno Tim Schmelzle Tom Wang Antti Zhang Tuesday, October 12, 2010

  2. Presentation Outline • WFR Stock Purchase History • Company Overview • Industry Outlook • Historical & Recent Stock Performance • Acquisition Activities • SWOT Analysis & Porter’s Five Forces • DuPont Analysis • Competitor Analysis • Financial Statement Analysis • Financial Projections (DCF Valuations) • Recommendation

  3. WFR Stock Purchase History • March 2008: 200 shares were bought @ $78.15 • December 2008: 400 shares were bought @ $14.43 • Cost basis=($78.15*200+$14.43*400)/(400+200) =$35.67 per share October 8, 2010 Closing Price: $13.09 Market Value of 600 shares: $7,854 % Portfolio Holding = 2.39% Unrealized Loss=$35.67*600-$7,584= $13,548 or 63.3%

  4. Company Overview • MEMC, based in St. Peters, Missouri, is a global leader in the manufacture and sale of wafers and  related products to the semiconductor and solar industries. • Founded in 1959 • Employees 4,800 people worldwide • 2009: Recorded Sales of $1.2 billion • Stocks traded on New York Stock Exchange and is included in the S&P 500 index Data provided by www.memc.com as of October 10, 2010

  5. Company Overview MEMC operates three business units: • Semiconductor Materials ($7 billion market size) • Manufactures silicon wafers which are used in building semiconductor devices • Solar Materials ($10 billion market size) • Manufactures silicon wafers which are used in building solar cells and solar modules • Solar Energy ($39 billion market size) • Sun Edison, MEMC’s subsidiary develops, finances, installs and operates solar power plants for its customers Information provided by www.memc.com as of October 10, 2010

  6. Global Sales and Manufacturing Image provided by www.memc.com as of October 10, 2010

  7. What is a wafer? • A thin slice of semiconductor material, such as silicon crystal, used in the fabrication of integrated circuits and other micro devices. • A solar wafer is a circular solar cell made from the entire wafer. • Wafers are formed of highly pure, nearly defect-free single crystalline material. • Wafers are the foundations upon which semiconductor and solar cells are built. Image provided by www.memc.com as of October 10, 2010

  8. Image provided by www.memc.com as of October 10, 2010

  9. Industry Outlook • Recent growth in the industry is not sustainable and is attributed to a rebounding effect from the recent economic downturn. Growth for the remainder of 2010 is expected to continue diminishing from it’s present 27% to 6.3%, by 2011 and remain at 6.3% for the year. Growth is then expected to fall to the 4-5% range for the next several years. • Core growth in this industry is expected to come from cell phone sales and non-retail avenues, primarily commercial solar development and military use. • Consumer electronics outside of the cell phone industry is viewed as a mature sector with little growth. • Thin film technology promises to displace wafer technology within the solar industry at increasing rates and is expected by many to render wafer technology obsolete in time. Data provided by www.sia-online.org as of October 10, 2010

  10. Industry Revenue Chart produced by Yahoo Finance www.yahoo.com

  11. Historical Stock Performance Chart produced by Yahoo Finance, October 9, 2010 http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=

  12. Historical Performance Chart produced by Yahoo Finance, October 9, 2010 http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=

  13. Recent Stock Performance Chart produced by Yahoo Finance, October 9, 2010 http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=

  14. Recent Stock Performance Chart produced by Yahoo Finance, October 9, 2010 http://finance.yahoo.com/echarts?s=WFR+Interactive#symbol=WFR;range=

  15. Acquisition Activities • November 23, 2009 MEMC completed acquisition of privately held Sun Edison, a developer of solar power projects and North America’s largest solar energy service provider. (Paid with $314 million, 70% cash, 30% MEMC stocks) • July 2, 2010 MEMC completed acquisition of privately held Solaicx. (Paid with $66 million cash, and plus $10 cash equivalent of investment in Solaicx.) The acquisition expected to be accretive to earnings per share in 2011. • Based on the MEMC’s recent frequent acquisition activities, we expect more acquisition activities will be initiated in the near future. Information provided by www.sunedison.com & www.memc.com as of October 10, 2010

  16. SWOT Analysis • Strengths • Large Cash Reserves • Production of polysilicon • Internal sales to SunEdison • Weaknesses • Overcapitalized (Too much Capacity) • Recent investments in old technology • Competitors located in Japan / China • Several highly diversified competitors • Very low pricing power

  17. SWOT Analysis • Opportunities • Further diversification • Reductions to COGS • Acquisition into new technology • Increased adoption of SunEdison Power Plants • Threats • Slow/no growth economy • Fiscal Austerity • Protectionism • Wide adoption of different technology • IRS audit / Lawsuits

  18. Porter’s Five Forces • Bargaining Power Suppliers – Low • MEMC produces Polysilicon • Polysilicon price is market driven • Threat of New Entrants – High • Increased demand for existing fuels • Competitors patents / innovations • Semi business is already commoditized • Barriers to Entry – Medium High • High fixed capital costs / burn rate to start • Need for constant R&D and innovation • Govt subsidies and investor funds are available

  19. Porter’s Five Forces • Bargaining Power of Buyers – Very High • Short contracts for Semi-wafers (3-6 months) • MEMC is largely a price taker in Semi-wafers • Clean energy is a “like” not “need,” or “want” • Long term supply contracts for Solar wafers • Three out of four have since been renegotiated • Industry Rivalry – Very High • Multiple wafer companies competing on price • Semi-wafers are highly commoditized • Competition for subsidized projects • Competition for adoption by competing technologies • Semi-Materials and Solar-Materials Industry seems unattractive

  20. DuPont Analysis • Profit margin gets squeezed during slowdown due to high fixed costs Data provided by Capital IQ as of September 17, 2010

  21. Competitor Analysis • Semiconductor Wafers • Shin−EtsuHandotai • Highest Market share at 32.4% • Highly diversified Japanese company • Sumco • 29% Market Share • 156mm Solar Wafers • LDK Solar • 1.23B Market Cap; 1.10B 2009 Revenue • ReneSola • 1.13B Market Cap; 510M 2009 Revenue • Solar Energy Production • First Solar Inc. • 11.77B Market Cap; 2.07B 2009 Revenue • Thin Film Solar • SunPower Corp. • 1.3B Market Cap; 1.52B 2009 Revenue December 31, 2009 10-K Yahoo Finance: Tickers LDK, SOL, FSLR, SPWRA respectively

  22. Special Mention • Holding $285 million in Goodwill from the purchase of SunEdison we value near $0 December 31, 2009 10-K Balance Sheet provided by EDGARS Online dated March 1, 2010

  23. Key Income Factors Importance Low High December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010

  24. MEMC Sells a commodity Sales and cost containment of COGS are primary drivers of profit. COGS are not driven directly by sales. Sales COGS F.A. Turnover Ratio: 1.0 3.6 3.4 2.9 2.4 2.8 2.7 2.1 .9 December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010

  25. MEMC Cost Control “The larger 300 mm wafers enable lower production costs, reducing the costs per individual component by approximately 30 percent.” Nanotechnology interview with Craig Barrett, Intel CEO, June 15, 2004 http://www.azonano.com/news.asp?newsID=180 “MEMC Moves to Full-Scale 300mm Wafer Production” BUSINESS WIRE Jan. 10, 2002 http://www.highbeam.com/doc/1G1-81567480.html Sales COGS December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010

  26. In 2002 MEMC deployed 300mm wafer technology Adjusted: 2002 25% 2003 25% 2004 15% 2005 5% Sales 5.5% Historical growth pattern COGS December 31, 2009 10-K Income Statement provided by EDGARS Online dated March 1, 2010

  27. COGS Remove Sun’s F.A. -332 2005 2006 2007 2008 2009 Imputed F.A. 461.42 550.21 711.78 954.52 1,292.89 F.A. T/O Ratio 2.4 2.8 2.7 2.1 0.9 Net F.A. 461.42 550.21 711.78 954.52 960.89 Sales 1,107.4 1,540.6 1,921.8 2,004.5 1,163.6 ANOVA Results: R2 = 97.5% F-Stat = 58 T-Stat = 13.7 Growth of F.A. has slowed to .66%, effectively 0% Sales and ratios provided by Capital IQ as of September 17, 2010

  28. MEMC Cost Control MEMC is completing the closure of their two largest manufacturing facilities 33%1by square footage compared to the total company to Malaysia. We estimate it will be able to produce 50% of the company’s total output at a 20% cost reduction. This effect has been incorporated into our model at diminishing returns over the next 10 years. 1MEMC 10-K (.pdf version) dated December 31, 2009: p21

  29. DCF Analysis-Revenue Estimate Sales Estimate is based on industrial analysis and comparison analysis We separate SunEddison and MEMC’s traditional business-Wafer COGS is calculated as a function of MEMC’s cost and SunEdison’s cost. The COGS Margin is declining. Implying their restructuring effect

  30. DCF Analysis-WACC Cost of Debt 3 Level Rating Float: BB,BBB,A- Weighted average by comparable analysis 10 years US note Cost of Equity Beta Unlevered Industrial Beta(NYU Report) Historical Beta (Yahoo Finance) Risk Premium Market Return (Bloomberg Estimate with Adjustment) 10 years US note CPAM: WACC:15.28% Float rate from Standard & Poor

  31. DCF Monte Carlo Stimulation By Crystal Ball

  32. Recommendation The stock is currently trading at $13.09. Our intrinsic value for WFR is $14.14. We therefore recommend a modified holding strategy. Sell the original 200 shares at $13.09 and repurchase them after the waiting period to capture the unrealized loss. Estimated cash to fund would be approximately $3,900 while maintaining our position.

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