MEMC (WFR) has three divisions: semiconductor, solar material, and solar energy (SunEdison). MEMC is a leading provider of wafers to the semiconductor business. It also uses those wafers to develop solar materials in-house. The third division, solar energy, is the SunEdison business in which they install and operate some of the world’s largest solar power plants. Using the 10 point stock checklist, here’s how WFR performs:
- CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action. A good chart gets a 1, a bad one, -1 and inconclusive is 0
0; It is unclear if the price action is about to diverge with the RSI. From a technical aspect, there is no clear indication which way the stock will move next.
- ANALYSTS- read analyst reports but come to your own conclusions. If the consensus is favorable, 1; if unfavorable -1, and mixed 0.
0; Most analysts have WFR in a hold position. Future earnings of WFR are too unclear.
- INSIDERS- if the people that know the company the best are not buying it, why should you?
0; Recently, insiders have neither bought nor sold very much. This could be due to the fact that the officers are already compensated heavily in stocks.
- MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers. If all three of them can agree on the verbiage, it’s passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment.
+1; WFR experienced higher volume in all three divisions (Solar Materials, Solar Energy, Semiconductors) for Q1 FY2010 accompanied by an increase in prices, as well, for its Semiconductor and Solar Material businesses. An unfavorable legal verdict (costing $13.1 million) and costs related to damage from the Japanese earthquake (costing $13.3 million for Q1, $18 million for Q2) dragged down Net Operating Income in the first quarter and will continue to affect NOI into second quater. In addition, massive capital expenditures in the first quarter led to substantially higher cash flow use. However, managers are optimistic that these costs will be reduced throughout the rest of the year and gross profit margin will grow to about 21-24%.
MARKET DIRECTION- 80% of stocks follow market direction in the short term. This is your read on the market. Don’t have an opinion, it’s a 0.
0; In the short run, unclear if the market will start making upward bounds…could continue to stumble along.
- SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience
-1; ~65% of sales are in Solar Energy (SunEdison) and Solar Materials. Investors are currently unsure about the state of the Solar Energy/Materials sector because of uncertainty of sector performance without government subsidies.
- CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.
-1; Cash flow is expected to be negative this year due to plant repairs in Japan, unfavorable legal verdicts, and high capital expenditures for current solar energy projects. Another current issue is the decline in wafer prices due to reduced solar power incentives in Italy.
- PEG RATIO- it’s good to find a company growing faster than it’s multiple.
+1; Undervalued (PEG=.62) compared to semi-conductor industry (PEG=.94). Earnings are growing faster than its PE ratio.
1. VALUATION- contrary to popular opinion, valuation does matter. Use a discounted cash flow analysis. If the stock is trading for substantially less than its DCF, that’s a 1.
0; Current intrinsic stock value is 0 because current net operating margin (~3-4%) is too low. Long term, solar energy could become a viable substitute to other energy sources but for now, it is too dependent on government subsidies. The reduction of solar power incentives in Italy shows how susceptible MEMC is to changes in government subsidies.
- CATALYST- what’s going to change the status quo?
0; If government subsidies ramp up again, the solar energy industry could see a boost. However, seeing as that is not happening and substitutable products (namely, natural gas) remain cheaper options in the short run, the status quo is not expected to change in the near future.
The total score is 0. The major problem with this company is that Italy recently reduced its solar power incentives so there is now a worldwide excess supply of solar wafers. As wafer companies such as MEMC liquidate their inventories, wafer prices will continue decline into the foreseeable future. This is not the right time to be investing in WFR because WFR has not yet reached its price floor. I believe it will reach its price floor only once its wafers’ price stabilizes.