MEMC Electronic Materials, Inc. (WFR)

weiwentg (97.33) Submitted: 9/8/2008 5:42:13 PM : Start Price: $38.68 WFR Score: +18.97

MEMC sells silicon wafers to semiconductor companies, and lately to solar companies. Silicon wafers are a commodity, and this is the centerpiece of my underperform thesis. Lately, pricing has been very strong for wafer suppliers. People are starting to get bullish on alternative energy, and MEMC's recent contracts with some large solar producers have made a lot of folks bullish.However, there is little to differentiate the wafer suppliers. They supply a commodity and the industry is cyclical. Folks ought to remember that during the last round of the cycle, MEMC nearly went into bankruptcy after a bout of overinvestment followed by a price decline. It's no stretch to imagine that there could soon be a glut of capacity on the market.One can succeed in a commodity industry by being the largest supplier. For example, Potash Corp of Saskatchewan controls a huge proportion of the world's potash supply, similar to Saudi Arabia controlling a large part of the world's oil supply. POT can afford to wait out a downturn. MEMC doesn't have the same dynamics going for it. It isn't the largest supplier. It is more or less in a perfectly competitive economic environment with its peers.So, sure, the recent solar contracts are a boon, and recent pricing has been strong. However, at some point, that's going to change. Excess capacity will eventually lead to a decrease in prices. MEMC has no durable competitive advantages to keep it going - any of its competitors could sign a contract with any of the big solar firms.