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

To: Ian@SI who wrote (4174)	2/8/1999 2:57:00 PM
From: Andrew Vance	Read Replies (1) \| Respond to of 4697

Hi Ian, How are things going over here with our heart attack kid, WFR? <GGG> A reader over at Stock Swap mentioned that I might want to come over here. So, as long as I am here, I would love to discuss a stock that has replaced UTEK in my fanatical mind<G>. As a matter of fact, the enabling technologies seem to be occupying the most amount of grey matter with the exception of WFR. The only bad things I can say about WFR are the upcoming dilution (if you do not participate) in the VEBA deal, fabs are not ramping as fast as I would like them to, price erosion (only becasue of the extra capacity), and 300mm not coming on as strong as anticipated. Even though that sounds like a death knell of sorts, the upside is phenomenal for WFR. Before I go into greater detail, I would love a consensus opinion from the people here about a few things. Then I would put it through a model I fool around with. 1. What is the consensus opinion for the % reduction in the number of operating fabs. With some of the consolidations (Hyundai-LG Semicon) and others, have we actually seen a reduction in the total possible operating capacity. 2. OF the remaining IC manufacturing sites, at what capacity do we now believe they are operating at? 3. How much new IC manufacturing capacity has come on line to replace older fabs or for expansion purposes? 4. What is on the books for coming on line this year and next? 5. How many fabs have converted over to 8" facilities. 6. How many 4" Fabs have been shut down for good? Actually as much data as we can get our hands on to make the model and its output more meaningful. The shift to epi wafers, even with proce erosion, should be a higher margin business for WFR. The book value of the company certain is not being reflected in the price of the stock and the ability to recover quickly when fabs ramp up is totally being discounted by the market. Do not get me wrong, WFR is riding through some rough times since their business is really volume related. Putting up all the new facilities and have them become idle has been and will continue to be costly. But with all the cost cutting moves, when they do ramp up, the recovery should be astronomical. I have received some comments on this and respect the comments made relative to the supply - demand equation for the next 3 years. However, as a veteran of this industry, I have seen the mask makers and the wafer providers get eviscerated by their customers when times were bad and there was more supply than demand. These companies normally suck it up and take the beating when the IC industry has less demand than the supply they offer. The mask makers and the Wafer providers bring on board step function capacity when they expand. This creates an inbalance that takes a few years to rectify. When this capacity is brought on board at a time when the industry goes into a tail spin, it is disasterous. However, I have seen the feast and famine cycles numerous times and what goes around comes around. I am a good friend of a Purchasing Manager for a semiconductor manufacturer in the inter-Mountain West. It was not too long ago when he was begging on hands and knees for wafers from all the suppliers to meet the needs of his company. Demand was high and supply was tight. This was just about the time when WFR was going public (IPO). I was told that, becasue the CEO of this IC company had raked the wafer producers over the coals the last downturn, no one wanted to guarantee delivery of Wafers to them. They were forced to buy their silicon on the spot market. They went through a few quarters of anguish before supply loosened enough requiring that they lock in deloveries to this company. Eventually demand will catch up and exceed supply and you will see prices rise again. Be that as it may, what I think is being overlooked by the street these days is how fast the Wafer producers can recover during an IC industry recovery. I do not think the majority stock holder VEBA, AG would be looking to taking a bigger stake in MEMC, if they did not think there was some hidden value to this company. Rarely do we throw good money after bad. Speaking of which, ever wonder why WFR trades extremely low volumes and its price can change on very small volumes? Conservatively, is this is a huge turnaround candidate when the 300mm initiatives come to fruition? All the infrastructure is in place anmd is being depreciated as we move forward. These costs are hitting the bottom line now, though. Personally, I see a great deal of wafer volume, capacity, and new technoligy dragging down this company for the next quarters. However, when it does come around, it will be as fast as the recent run ups we have seen in the equipment sector. It does not take but a few percent increase in capacity or a few new fabs coming on line, to create a major flip from the loss column to the profit side, even with low margins. You do make it up in volume. You may not go to feast from famine but with a margin of 11.5% from a year ago (low value since it was during a downturn) and the present -15% margins, it won't take much of an up-tick in IC manufacturing capacity to turn the tide. Any information I can share after putting a hand to the calculator and inputs to the models, will be presented here. Lets keep our fingers crossed on this one and wait for it to perfrom. Andrew Vance - Editior RadarView Semiconductor Financial Newsletter stepman@hotmail.com