WFR Uber Allies

The world’s largest solar system integrator, Germany’s Conergy Energy (CGY.DE – Last trade €27.24), recently pre-announced that they will miss their earnings estimates due to delays in receiving solar modules. It therefore comes as no surprise that the company plans an assertive shift to more in-house production, and MEMC Electronic (WFR – Last trade $71.16) will play a pivotal role in these transformation efforts.

WFR revealed last week that they have signed a 10-year solar wafer supply agreement with Conergy. The deal is valued northwards of $7 billion, and the terms of the agreement allow WFR to participate in the expansion of Conergy’s solar module subsidiary. In addition, WFR announced that it has expanded its original 10 year agreement with Gintech by another $700 million, for a contract that is now valued between $3 billion and $4 billion. 

WFR’s mixed Q3 results failed to dent enthusiasm for the company’s prospects, as investors instead focused on the increased visibility that came with the German supply contract. Friedman analyst Medhi Hosseini estimates that about 90% of WFR’s FY08 solar wafer capacity has already been contracted, and the increased visibility is probably the main reason for the stocks rally to a new 52 week high.

Solar analysts have always pointed out that WFR has been a sum of two parts, with its solar business carrying a valuation premium owing to its growth relative to the company’s core semi wafer business. But the Conergy deal will likely change the way investors value WFR. Paul Fleming, an analyst at Soleil Securities, went as far as to say that the Conergy deal has transformed WFR from a semiconductor company to a polysilicon/solar wafer company with an interest in semiconductor wafers.

Given the sharp appreciation of WFR shares over the last few weeks, it is likely that these deals have already been properly baked into the share price. But there may be some more upside in the near-term: UBS recently told their clients that WFR has enough polysilicon left to sign one more customer for a 10 year deal that could be valued between $2 billion and $3 billion. The long-term implications of WFR’s shift away from the semi wafer business to the rapidly growing solar business could drive much of the share’s upside in the weeks ahead.

Disclaimer: I do not own WFR or Conergy. I do not own a solar panel.