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Technology Stocks : MEMC INT'L. (WFR -NYSE) The Sleeping Giant? -- Ignore unavailable to you. Want to Upgrade?

To: cluka who wrote (4479)	8/14/1999 10:50:00 AM
From: Zeev Hed	Read Replies (2) \| Respond to of 4697

Cluka, welcome aboard this ship of fools. From a fundamental point of view, I think that WFR still has a lot of problems and needs some major price increases to get profitable. Will they get it? I do not know. From a technical point of view, WFR looks very strong and should not breach the $14/share. If it does, it may means that the current hopes of price increases are not materializing. I just bought a little at $14 and change, but this is a pure technical buy. If you look at the last quarter they were still operating at negative gross margins, price were still declining (albeit at single digit rates).Assume a very nice environment, in which they have improved their cost of goods by 5%, increased unit sales by 20% and got an over the board 10% better prices, their gross margins will be just 8 MM in the positive (relative to last quarter). Since they have expenses in the range of $60 MM, they still will not bring anything to the bottom line. They may be positive cash flow, because their depreciation charges are probably in the $40 MM per quarter and they might improve their inventories and accts receivable. But profits? To get profits their quarterly sales will have to reach some $350 with gross margins of 18.3% (10% price increases and about 10% in improvement of margins due to doubling volume). That model, by the way will just bring them to break even, no profits. How can they double their volume? They do not have money to expand their facilities and if they double their volume their annual sales rate will reach $1.4 Billions. Well the whole industry was $5.2 Billions last year, assume a 30% increase (10% price and 20 actual wafer increase), that gets you to a total volume of $6.76 Bill for the industry of which $1.4 Billions would be about 21%. I just do not see a rational scenario short of margin explosion into the 30% plus and doubling their production which would yield $.5/share. And frankly, at the current price you are paying 30 PE for such very doubtful rosy scenario. Thus from a fundamental point of view, I do not think this is a very good bet. Zeev