MEMC Electronics Shifts to Recovery Mode

The cyclical nature of the semiconductor industry compels investors to dig harder for winners when chips aren't flying off the shelves. Now is one of those times.

Still, companies -- and their stocks -- can outperform during lackluster periods of demand by boosting operational efficiency and maintaining a superior balance sheet. MEMC Electronic Materials(WFR) may be one of these companies.

Last week, MEMC, which makes silicon wafers -- the round plates from which microchips are cut -- reported fourth-quarter results that exceeded Wall Street's expectations but that reflected an ongoing inventory correction.

Shares have stumbled so far this year to $12.25 since closing out 2004 at a 12-month high of $13.25. Meanwhile, the price-to-earnings ratio of 11.3 and price-to-sales ratio of 2.2 are sitting at or below historical averages, respectively.

But the balance sheet provides the most interesting vantage point from which to judge where this St. Peters, Mo.-based company is headed and why its stock may not be fully reflecting the near- and intermediate-term outlook.

During the fourth quarter, MEMC retired $67.7 million in debt that wasn't due until 2007, leaving it with long-term debt of just $116 million. After paying off $140 million in debt in 2004, MEMC repeated last week that it expects to be debt-free by the end of the current year.

That reduced debt load will further improve what already is an impressive cash flow trend. After generating $127.2 million in operating cash in 2003, MEMC churned out $283 million in cash in 2004.

If cash flow improves and debt gets eliminated, look for MEMC to strategically put that cash into play. Chief Executive Nabeel Gareeb said during a conference call last week that once the debt burden is gone, the company can begin to consider "lots of opportunities," specifically stock buybacks and partnerships.