MEMC Should Trade at a Premium
MEMC Electronic Materials, Inc. (WFR) produces the raw material wafers used by semiconductor manufacturers in the production of integrated circuits (ICs). The decision to supply wafers to the solar industry is paying huge rewards as demand for polysilicon has raced ahead of supply.
The Solar business and the 300mm business are both high margin products and the firm is projecting a 250 basis point (bps) increase over the next quarter. The December top-line missed the consensus estimates due to a one-day delay, while the bottom-line beat by $0.02.
We are reiterating our Buy rating on the Shares of WFR. The stock presently trades at a multiple of 17.4x our estimate of 2008 earnings (P/E) (pro-forma adjusted for Stock option comp).We expect the firm to outgrow the general semiconductor industry based on its 300 millimeter product line and its solar business. The firm's balance sheet has improved dramatically and cash now stands north of $1 billion. This should pave the way for future share buybacks and potential mergers in the solar industry.
Despite the top-line and gross margin miss this quarter, margins continue to improve. We feel the weaker TSMC capital expenditure numbers are not a sign of weakness, but the situation bears watching.
We value the company based on the average of our P/E multiple (26.0x 2008 estimated EPS) and our two stage intrinsic model. The semiconductor group average P/E is between 25x-26x. We feel WFR should trade at a premium to its peers, given the fact that the company has high growth/high margin products.
CYBX Getting Past Audit Committee
Cyberonics, Inc. (CYBX) reported Q3 EPS that beat our estimate by $0.05 on sales that also exceeded our forecast. We again increased our FY08 EPS estimate. We lowered our FY09 revenue estimate.
CYBX continues to progress in its new strategic priorities. A restructuring of the lease on its corporate headquarters in Q3 is expected to result in additional cost savings. The company revealed more details on its depression strategy.
At its current price of $12.37 per share, CYBX is trading at 2.4x our fiscal year 2009 revenue estimate of $137 million, which is at a discount to the group average multiple of roughly 3x. The company's growth expectation has been reduced from the unsuccessful attempt at gaining national reimbursement coverage for the depression indication. The audit committee completed its internal review and concluded that the accounting for certain stock option grants to employees, officers, and directors during certain periods was incorrect.
The company has restated most or all of its consolidated financial statements for these periods. The audit committee's conclusions resulted in the resignations of CYBX's CEO and CFO. The company recently appointed Daniel J. Moore as President and CEO and Gregory H. Browne as CFO. In addition to reduced growth, the stock is also under pressure from the going concern qualification. At roughly 2.7x our 2009 revenue estimate, our price target remains at $13.50.
Phoenix Companies in Turnaround
Fourth quarter '07 operating results of The Phoenix Companies, Inc. (PNX) were below our expectations. Net income reported a significant decline primarily due to impairment charges and the sale of EMCO, its Argentine subsidiary.
By continuing its focus on enhancing its distribution for life and annuity products while curtailing its expense base, PNX remains a turnaround story, in our opinion. While PNX has experienced ROE improvement, the level remains significantly below its peers. The current credit environment and economic slowdown will weigh on the company and the industry as well.
We have adjusted our 2008 earnings expectation to $1.15 per share from $1.20 per share to reflect 4Q07 results and generally expected trends for this company. In addition, we have installed our early 2009 earnings expectation at $1.30 per share. Phoenix's shares currently trade 0.49x its 4Q07 book value (excl. AOCI) of $21.71 per share and 0.53x reported book value of $19.99 per share.
Even though the ROE has improved in recent quarters it is still less than half the median level of its peer group. As a result, the current price-to-book multiple is less than half of the median level of its peer group.
We believe the current valuation for PNX is justified, given the company's profit margins and ROE, and considering the current price to our 2007E EPS.
