Altai Capital Loves This Promising Solar Company, Should You?

Altai Capital, managed by the trio of Rishi Bajaj, Toby Symonds, and Steve Tesoriere, is a mid-sized hedge fund with an estimated $620 million in assets under management. Altai uses a variety of investment strategies, and has roughly half of its capital allocated in U.S equities. With a 13F portfolio of just under $200 million, the fund has a strong focus on the technology sector, most notably in MEMC Electronic Materials, Inc. (NYSE:WFR). Altai’s position in the semiconductor materials and solar energy company accounted for 18.7% of its total 13F holdings at the end of last quarter. Here’s a look at Altai’s portfolio in its entirety.

MEMC Electronic Materials, Inc.MEMC Electronics is a relatively unique company due to the fact that it has been an established producer of silicon wafers for use in semiconductors for the better part of the past half-century, though the majority of its revenues come from a much newer solar energy business. At the end of its most recent quarter, 40% of the company’s top line was derived from traditional operations, while the other 60% was from its solar segment, which is almost exclusively a result of its acquisition of SunEdison in 2009.

Despite the fact that MEMC has already made great strides in solar power, it is still pushing to increase vertical integration, especially into the business of actually installing the panels themselves. As is typical with any company that establishes this type of comprehensive model, efficiency will improve. The company’s gross margin is currently between 6-7%, which is far below pure solar power companies First Solar, Inc. (NASDAQ:FSLR) at 26.9%, and SunPower Corporation (NASDAQ:SPWR) at 10.0%, and a hybrid like Veeco Instruments Inc. (NASDAQ:VECO) at 45.5%, which makes LED and solar equipment.

As semiconductor prices remain stuck at historically low levels near $20-$25 a kilogram, MEMC has seen its profitability take a sharp dive downward over the past five years; the company’s earnings have shrank by an average of 52.3% a year, falling far flatter than Vecco Instruments (+57.3%), First Solar (+35.9%), SunPower (-19.4%), and the Chinese Trina Solar Limited (NYSE:TSL) at +38.4%. Shifting its focus on the higher-margin solar power industry will make a difference going forward, as MEMC will have a distinct advantage over the majority of its competitors – it will control wafer production in-house. Over the next half-decade, analysts expect the company to generate positive annual EPS growth of 15.0%.

From a valuation standpoint, it appears that the markets are underappreciating the synergies that MEMC should take advantage of once vertical integration is completed. The company’s stock trades at a forward earnings multiple of 8.7X, which is below its historical average P/E of 12.8X, and the likes of Veeco (15.1X) and SunPower (20.5X). Interestingly, First Solar is cheaper than MEMC when using this metric, as its five-year expected EPS growth (16.2%) is a tick above the company’s own expected growth rate.

MEMC trades at modest price-to-book (0.9X) and price-to-cash flow (1.2X) ratios, and is undervalued quite significantly on a sales basis, as the stock sports a P/S multiple of 0.2X. This is over 50% lower than pure solar competitors like First Solar, SunPower, and on-line with Trina Solar. Integrated competitors have much higher sales multiples; Veeco’s is 1.5X.

In addition to its bullish EPS outlook, predominantly attractive valuation, and continued shift toward solar panel production and installation, it’s not a bad reason to follow Altai Capital into MEMC. Since doubling its stake in the company earlier this year, Altai has seen a return of close to 40% on its investment in a little over four months. Other hedge fund managers that have benefited from this appreciation are Steven Cohen, Chuck Royce, and John Levin. For a complete look at the industry’s sentiment toward MEMC, continue reading here.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!