By Stockpickr Guest Columnist
Notable Calls

Semiconductor company MEMC Electronic (WFR) got some very bullish analyst commentary last week, despite warning to the downside on heels of a direct hit of Hurricane Ike on its facilities.

Analyst Calls

On Sept. 24, RBC Capital upgraded the stock outperform from sector perform based on a likely renewal of demand growth in the solar sector led by pending passage of an eight-year extension and expansion of the U.S. solar tax credit program and a compelling valuation, which it believes indicates over-pessimism baked into current share prices.

The firm notes that its caution on MEMC this year has been predicated on silicon oversupply risks in 2009 exacerbated by the company's execution issues. But it believes the fundamental headwinds in semi pricing, deterioration of spot poly prices in 2009 and a limited upside to third-quarter numbers from Hurricane Ike's impact is more than baked into the shares -- trading at about six times full-year 2009 estimates of $4.84.

RBC highlights the company's $1.4 billion cash position, zero debt and about $150 million cash flow per quarter. A six-times forward multiple represents a historically low mark, even looking back to previous semi cycle downturns and large discount below the nine to eleven times multiple of comps such as Wacker Chemi and Shin-Etsu. RBC's 12-month target for MEMC stands at $53.

The next day, on Sept. 25, JMP Securities upgraded the stock to market outperform from market perform, saying it views the stock as oversold.

Despite the problems at MEMC's Texas polysilicon production plant following Hurricane Ike, its checks suggest that polysilicon production continues to ramp smoothly, and the company has good visibility for 2009 on 15% to 20% revenue growth and 20% to 25% earnings growth for 2009 based on its long-term contract arrangements.

While JMP continues to believe that MEMC is operating in a cyclical, commodity semiconductor wafer and solar polysilicon/wafer business in which capacity expansion will likely catch up with demand in the 2010 timeframe, the firm believes that the stock reflects all the bad news.

Meanwhile, a weakening dollar and $100-plus oil prices, steady solar demand and better visibility on continuing positive policy and tax credits for solar energy installations in the U.S., Europe, Japan and emerging markets suggest good visibility on earnings growth through 2010.

The stock appears oversold at 6.5 times calendar 2009 earnings estimate relative to its outlook for 15% secular earnings growth. The firm's target is $48.

Kaufman Brothers is one of the most bullish firms on the Street when it comes to MEMC. On Sept. 25, following the guide-down, the firm reiterated its buy rating and whopping $80 target, saying the company is now putting up 75-cent to 80-cent quarters, annualizing to $3-plus. So if one assumes $3 on an annual basis and assigns a 10-times multiple, it is a $30 stock, which is where it is today.

However the demand for silicon exceeds supply, and the company has all the equipment in place to double output and get to $6 EPS at some point in the future (which, at a 10-times multiple, would make it a $60 stock). In Kaufman's view, the business environment could not be better.
Its price target is $80 and is predicated on an 18-times $4.48 2009 EPS estimate.

The analyst notes that Kaufman normally would not be enthusiastic about a company that has missed the last five consecutive quarters and is facing possibly several more quarters of missed expectations, but it thinks the issue is not as much guidance as it is the Street getting ahead of itself. The firm notes that it still has the lowest expectations for this quarter, next quarter and all of 2009. It may not be conservative enough, but it is factoring in manufacturing glitches for the next four quarters. Kaufman believes it is important to keep estimates in check because ramping silicon production is very challenging, and it has tried to account for that in its numbers.

Notable Calls' Take

I think it is also worth noting that most of the Tier 1 firms covering MEMC also defended the stock throughout last week, yet the stock did pretty much nothing, zig-zagging around its 52-week lows.

What I suspect is going on here is that people are getting frustrated with management's track record and general bad luck haunting MEMC. Let's face it: MEMC has been a serial disappointer. Yet there is clearly a lot of value here at just six times 2009 EPS.

I continue to view MEMC as a coiled spring, ready to boost higher on anything positive. The shareholder base has been reshuffled to some extent, with the hot money types getting out and long-term value investors getting in. This means that future rallies will not get sold as aggressively as we have seen over the past months.

Short interest has been declining, standing at just 2% of float. Even the shorts seem to view MEMC's valuation as too low.

What could ignite the stock? I suspect it would take just one good quarter from the company to send the shares in the $40-plus range. It looks like a good risk/reward play here.

Know What You Own: MEMC operates in the semiconductor industry, and some of the other stocks in its field include Applied Materials (AMAT), Texas Instruments (TXN) and KLA-Tencor (KLAC). These stocks were recently trading at, respectively, $15.25, down 4.4%; $22.30, down 4.1%; and $32.42, up 2.2%. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

Posted on Sept. 29, 2008