Semiconductors: Ready for a New Cycle?
09/08/2006 12:00 am EST
Expressing confidence in the resurrection of the semiconductor industry, Vahan Janjigian makes a case for more hopeful times, and recommends a company poised to take advantage of increasing demand in this once very-hot sector…
“MEMC Electronic Materials (WFR NYSE) controls about 10% of the world market for semiconductor wafers used for making microprocessors, memory chips, and other components found in electronic devices and equipment. The US is its largest single geographic market, accounting for 31% of the company’s 2005 revenues. 45% of sales came from the Asia-Pacific region. WFR can tailor characteristics such as composition, purity, and crystal and electrical properties, for custom specifications. Furthermore, WFR produces substantially all of the polysilicon (a primary raw material) it needs, a key competitive advantage in recent periods as polysilicon prices rise.
“The company’s products include prime polished wafers that are highly refined and have ultraflat and ultra-clean surfaces. They include the OPTIA wafer, which utilizes WFR’s proprietary Magic Denuded Zone (MDZ) technology to create a 100% defect-free crystalline structure. Epitaxial (EPI) wafers have a silicon layer grown on top of the polished surface that differs from those of the wafer itself, allowing better isolation of circuit elements not intended to communicate with one another. Test/monitor wafers are similar to prime polished wafers, but they have less rigorous specifications and are used by customers for semiconductor fabrication testing and other processes.
“Last year was characterized by high inventories and low selling prices. However, demand for wafers has rebounded. Demand for polysilicon from solar cell manufacturers is also contributing to WFR’s profits. Net sales for the first six months of 2006 increased 36% year-over-year to $712.1 million. The gross profit margin improved to 41.2% from just 32.6%. The operating profit margin jumped to 32.2% from 22.2%. Net income surged 53% to $149.3 million or 65 cents per share. Operations improved significantly on a sequential basis as well. Sales climbed 8.5% from Q1 to $370.5 million in Q2. Net income improved 21.7% from Q1 to $81.9 million or 36 cents per share in Q2. Risks remain despite these encouraging results. Some of WFR’s customers have a more cautious view on unit growth for the remainder of 2006. Also, weak polysilicon prices would negatively impact profits. Yet industry conditions are favorable. Supplies of polysilicon are tight and demand is strong, so prices should remain firm. In particular, demand from the solar market is expected to grow three times faster than from the semiconductor industry over the next several years. WFR recently signed a solar wafer supply agreement, worth $5-6 billion over ten years, with Suntech Power Holdings, a leading maker of solar cells.”