MEMC Electronics Materials Selloff Overdone, says Kaufman Bros

* MEMC shares dropped 20% yesterday following its 2Q08 earnings release and no amount of pointing out the relatively low valuation helped. In one sense, we believe the worst of the problems are temporarily behind it. Ramping silane production is more problematic than converting it to polysilicon and that part is done for the time being.

* The industry is trying to quadruple capacity in the next three years. MEMC is trying to double capacity in two years. Trying to ramp production to meet soaring usage puts impossible demands on the people charged with bringing up the equipment. It is all but inevitable that the company would hit glitches trying to do both at the same time. The company has missed its revenue guidance every quarter for the last four quarters. In three of the last four quarters, manufacturing glitches were cited as the cause.

* The Street had placed exceptionally large expectations on 3Q08 revenue and management had to rein it in. We think the Street placed similarly oversized projections for SunPower (SPWR, BUY) in 3Q08 and it looks like it is doing the same to First Solar (FSLR, HOLD).

* In our view, it is inevitable that there will be further glitches, and we have a maintained a lower estimate to account for this. But we believe the Street had numbers that could only be achieved by a manufacturing process that was no more complicated than a 10-ton press punching out tuna cans. The shares are now selling for 12x our 2009 EPS estimate and may grow 25% or more in 2009. The macro environment for solar couldn’t get much better. The semiconductor industry might pick up next year and the company has $6/share in cash. There is a $1 billion share buyback authorized.

* The industry is going to triple capacity because it has to. MEMC is the third-largest player and so in a sense the world is depending on it.