MEMC Electronic Materials

Michael Bellisario Zach Chen Suyang Sean Hong Vignesh Murali Ron Yang
Tuesday, April 13, 2010 Ticker: WFR (NYSE)

MEMC Electronic Materials

Purchase History Business Overview Industry Analysis SWOT Analysis & Porters Five Forces Competitor Analysis Multiples Valuation Historical & Recent Stock Performance Financial Statements Analysis Management Assessment DCF Valuation & Recommendation

Purchase History
March 2008 Bought 200 shares @ $78.15 December 2008 Bought 400 shares @ $14.43 Cost basis - $35.67/share

April 9, 2010 Closing Price - $15.96 Market value of holding (600 shares) = $9,576 2.9% of total portfolio, 8.5% ex-cash (not including BGC) Unrealized loss of 55.3% or $11,826
Recommendation = HOLD

Business Overview
MEMC designs, manufactures, and sells silicon wafers Semiconductor wafers and solar wafers Solar projects through Sun Edison

Based in St. Peters, MO

One of four wafer companies with 10%+ market share NYSE Ticker: WFR

What is a wafer?
Wafers are the foundation on which the worlds semiconductors and solar cells are built All the processes of a micro device are conducted on a wafer Increased wafer sizes have increased device performance and reduced production costs
50mm, 100mm, 150mm & 200 mm wafers (top) 45nm (bottom)

Geographic Presence

Source: 2009 Annual Report

Business Overview
Semiconductor Materials ($7B market size) Continuous technological development and product innovation Solar Materials ($10B market size) Intense cost pressures and competition from thin-film technologies Solar Energy ($39B market size) Very competitive in terms of pricing and continuing evolution of technologies

Historical Demand
Semiconductor

Forecasted Demand

Sun Edison Acquisition

November 20, 2009 Vertical integration strategy closer to end customer North Americas largest solar energy service provider

Development of solar power plants and commercialization of solar energy

Solar project manager Construction & selling solar projects Selling electricity Ongoing maintenance & solar services

Sun Edison Acquisition

Business segment realignment Solar Materials Materials Business Semiconductor Materials Solar Energy (Sun Edison)

Sun Edison will retain name, become subsidiary of MEMC

$314.6 million purchase price Negative initial reaction by market $285 million of goodwill, $300+ million of debt Increased customer base Kohls, Staples, City of San Diego, Xcel Energy

Sun Edison Acquisition

Global Solar Capacity Expandable Market

ROW

Japan
China India U.S. Canada France Italy Spain Germany

Sun Edison

Source: 2010 Capital Markets Day Presentation

Sun Edison Acquisition

100+ Mws under management 3 billion kw/hrs contracted for 20 years 2009 accomplishments: 40 Mw, 135 systems installed 2010 goals: >100 Mws installed, 1 Gw backlog MEMCs growth going forward/highly uncertain though 20-yr contract, price pegged at or below cost of grid power Economically sensible only when there are substantial subsidies (Spain)

Sun Edison Acquisition

Customer Success Story Kohls Largest rooftop solar rollout in U.S. history System Type: Roof-mounted solar panels

System Size: 25 megawatts across 65 sites in California

Annual Savings: Reduced energy operating expenses Capital outlay for Kohls: $0 System will provide 20-30% of each stores power

SWOT Analysis - Strengths

50 years in the wafer industry Wide range of products Diversified geographic presence Sales in U.S. , Taiwan, China, Europe Strategic long term contracts 10-yr contracts worth about $10-12.5 billion Strong R&D $40 million in 2009

SWOT Analysis - Weaknesses

Operating disruptions Equipment failure in August 2009 at Pasadena, Texas facility decreased sales and gross margins

Low operating efficiency Declining asset turnover Reduced financial flexibility Significant capital diverted to Sun Edison business

SWOT Analysis - Opportunities

Long-term growth in renewable energy Potential increase in government support and investor demand as oil/commodity prices rise

Rebound in semiconductor shipments worldwide

Solar projects become more attractive as costs come down due to technology improvements

SWOT Analysis - Threats

Government subsidies Sun Edison would not be profitable without favorable government subsidies

Concentration of the buyers One customer in Materials Business accounted for 23% of 2009 revenues Top three customers accounted for 39% of 2009 total revenues

Porters Five Forces

Porter's Five Forces
New Entrants

Competition

Bargaining Power of Customers

Substitution

Bargaining Power of Suppliers

Competitors
Based on the following criteria: Initial list of competitors provided by MEMCs 10-k Biggest competitors from each segment (solar wafers, semiconductor wafers, and solar projects) Attempted to match revenues and markets

Trina Solar
Integrated solar-power products manufacturer Based in China with customers throughout the world Major competitor of MEMC in Germany, Spain, Italy, and the United States Currently produces more solar energy (megawatts) than MEMC

Shin-Etsu
Japanese-based chemical manufacturing company Wafer manufacturing = 40% of revenues, 41% of total assets Wafer sales 3x greater than MEMCs wafer sales Net income fell 60% last year

SUMCO
Japanese-based manufacturing company mainly engaged in silicon production Also produces silicon wafers for solar batteries Similar in size and revenues to WFR Revenues decreased 44% due to lower demand in North America and Japan (~85% of total revenue)

SolarWorld AG
German-based manufacturer of silicon solar wafers, solar cells, and solar modules Competes with WFR in the solar cells and panels segment

Top industry participant

38% drop in net income year-over-year

Sun Edison Competitors

First Solar Manufacturer of solar modules and solar power systems based in Tempe, AZ Acquired OptiSolar to increase exposure to solar power project development Revenues of $2.7B (66% increase year-over-year) SunPower Producer of high performance solar electric power technologies (solar panels & invertors) Acquired Tilt Solar in 2009 Revenues of $977M

Multiples Valuation
More weight toward P/B and P/S as they were more stable than EV/EBITDA Out of the eight competitors, most had negative earnings history; therefore we used forward P/E

Multiples Valuation
Company Semi Semi Solar Solar Solar Solar SunEd SunEd Shin-Etsu Co. SUMCO SolarWorld AG Trina Solar ReneSola LDK Solar SunPower First Solar MEMC Electronics Valuation Method P/S P/B EV/EBITDA Forward P/E Multiples Valuation Weight 40% 40% 0% 20% P/S 1.94 2.25 1.18 2.00 0.70 0.78 1.16 4.81 3.07 P/B 1.71 1.86 1.45 2.80 0.98 1.39 1.25 3.74 1.65 EV/EBITDA 6.32 7.11 76.00 9.60 12.00 8.98 Forward P/E 29.38 10.2 13.8 9.89 10.89 9.02 17.26 20.64

Multiples Range Low $6.54 High $28.58

$13.21

Historical Performance
Massive cost cutting, profitable by FY2003 TPG bailout, avoided bankruptcy

Solar wafer introduction

CEO resigns

Source: Yahoo! Finance

Recent Performance
Q3 results, Sun Edison announcement Positive 2010 guidance, Sun Edison clarity

Q2 results, sales at low end of guidance

New CEO

New CFO

Stock bottoms
Source: Yahoo! Finance

Market bottoms

Profitability
Revenue Vs COGs
2,500.0 2,000.0 1,500.0 30.0% 1,000.0 20.0% 500.0 0 2005 2006 2007 2008 2009 10.0% 0.0% 60.0% 50.0% 40.0% Gross Profit COGS Margin %

Proliferate market resulted in oversupply

Profitability
SG&A
180 160 140 120 100 0.08 80 60 40 20 0 2004 2005 2006 2007 2008 2009 0.06 0.04 0.02 0 0.16 0.14 0.12 0.1 Selling General & Admin Exp. SG A %

Management failed to control SG&A when sales fell

Liquidity
ST Liquidity
4.0x 3.5x 500.0 3.0x 400.0 2.5x 600.0

Total Current Liabilities

2.0x 1.5x 200.0 300.0

Current Ratio Quick Ratio

1.0x
100.0

0.5x 0.0x
2004 2005 2006 2007 2008 2009

Hold large amount of cash/buffered the impact of ST debt

Efficiency
ST Efficiency
2,500.0 18.0x 16.0x 2,000.0 14.0x 12.0x 1,500.0 10.0x 8.0x 6.0x 500.0 4.0x Accounts Receivable Turnover Inventory Turnover Revenue

1,000.0

2.0x
0 2004 2005 2006 2007 2008 2009 0.0x

Inventory is highly correlated to sales

Efficiency
LT Efficiency
2,500.0 3.5x 3.0x 2,000.0 2.5x 1,500.0 2.0x 1.5x 1.0x 500.0 0.5x 0 2004 2005 2006 2007 2008 2009 0.0x Revenue Total Asset Turnover Fixed Asset Turnover

1,000.0

Declining operating efficiency

DuPont Analysis
DuPont Analysis 2004 EBIT margin EBT/ EBIT Net Income/ EBT Assets Turnover Financial Leverage ROE 25.2% 75.9% 114.9% 100.0% 232.2% 51.1% 2005 23.2% 98.2% 98.8% 96.5% 161.4% 35.1% 2006 36.2% 105.8% 62.5% 87.3% 151.3% 31.6% 2007 44.2% 130.8% 74.3% 66.6% 141.9% 40.6% 2008 42.5% 68.7% 66.2% 68.3% 141.1% 18.6% 2009 -6.4% 150.9% 61.0% 32.7% 164.1% -3.1%

DuPont Analysis
ROE
70.0% 60.0% 50.0% 40.0% 30.0%

EBIT Margin

50.0%
40.0% 30.0% 20.0% 10.0% 0.0% -10.0%

20.0%
10.0% 0.0% 2004 -10.0% 2005 2006 2007 2008 2009

2004

2005

2006

2007

2008

2009

Assets Turnover
120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2004 2005 2006 2007 2008 2009 100.0% 250.0% 200.0% 150.0%

Financial Leverage

50.0%
0.0% 2004 2005 2006 2007 2008 2009

Management Assessment
Revised Q3 guidance (Sept.): $285-315 million in revenues, gross margins in mid to high single digits Q3 actual: $315 million in revenues, gross margins 6.6%

Q4 guidance (Oct.): $310-350 million in revenues, gross margins 10-14% Q4 actual: $357 million in revenues, gross margins 14.9%
Capital Markets Day presentation CFO said he would release updated financials in one month; EDGAR filing in exactly one month

Revenue Assumptions
Materials Business
Semiconductor Materials
Growth 2007 2008 2009 -24.1% -36.5% Sales 1,216.9 923.1 586.3 % of Total 63.3% 46.1% 50.4% 53.4% -47.0%

Solar Energy (SunEdison)

Materials Business Total % of Total 36.7% 53.9% 49.3% Growth 25.0% 4.3% -42.1% Sales 1,921.8 2,004.5 1,159.8 Growth N/A N/A N/A Sales 0.0 0.0 3.8 % of Total N/A N/A 0.3%

MEMC Total

Solar Materials
Growth Sales 704.9 1,081.4 573.5

Growth 25.0% 4.3% -42.0%

Sales 1,921.8 2,004.5 1,163.6

2010E
2011E 2012E 2013E 2014E 2015E 2016E

40.0%
8.0% 8.0% -5.0% 8.0% 8.0% 8.0%

820.8
886.5 957.4 909.5 982.3 1,060.9 1,145.8

50.2%
49.5% 48.7% 49.7% 49.1% 47.3% 46.5%

7.0%
10.0% 10.0% -10.0% 10.0% 15.0% 10.0%

613.6
675.0 742.5 668.3 735.1 845.3 929.9

37.5%
37.7% 37.8% 36.5% 36.8% 37.7% 37.7%

23.7%
8.9% 8.9% -7.2% 8.8% 11.0% 8.9%

1,434.5
1,561.5 1,699.9 1,577.8 1,717.4 1,906.2 2,075.6

N/A
15.0% 15.0% -5.0% 12.0% 20.0% 15.0%

200.0
230.0 264.5 251.3 281.4 337.7 388.4

12.2%
12.8% 13.5% 13.7% 14.1% 15.1% 15.8%

40.5%
9.6% 9.7% -6.9% 9.3% 12.3% 9.8%

1,634.5
1,791.5 1,964.4 1,829.1 1,998.8 2,243.9 2,464.0

Discount Rate Calculation

Risk-Free Rate Market Risk Premium Beta CAPM k(e) WFR 4.00% 5.00% 1.75 12.75% 15.50% 5.00% 6.00% 1.75 15.50% Market Return (5-yr) WFR ROE (5-yr) CAPM Expected WFR Alpha 0.69% 7.24% -2.17% 9.41%

Goalpost cost of equity = 15.5%

k(d) WFR % Equity % Debt Tax Rate WACC 6.00% 89.6% 10.4% 25% 14.36%

Adjusted Discount Rate = 15%

DCF Analysis
Current stock price: $15.96 15% discount rate 4% growth rate DCF price: $12.40
Sensitivity Analysis Discount Rate 12.40 2.5% 3.0% 3.5% Growth Rate 4.0% 4.5% 5.0% 12.0% 16.61 17.44 18.36 19.41 20.59 21.94 13.0% 14.39 15.03 15.74 16.53 17.41 18.40 14.0% 12.58 13.08 13.64 14.25 14.92 15.67 15.0% 11.07 11.48 11.92 12.40 12.93 13.51 16.0% 9.80 10.13 10.49 10.88 11.30 11.76 17.0% 8.72 8.99 9.28 9.60 9.94 10.31 18.0% 7.79 8.02 8.26 8.52 8.80 9.10

5.5%

23.50

19.53

16.51

14.15

12.26

10.71

9.42

Recommendation
HOLD current 600 shares Fair market value = $12.40 (DCF) - $13.21 (Multiples) Plus $1.70/share in excess cash & ST-investments High-low yearly price change = 108% Fair market range = $8.30 - $17.20 Current market price = $15.96 What to watch for: Materials Business margins/pricing pressure Government subsidies Sun Edison ramp-up/profitability/transparency