JBL: The Sweet Spot

Polysilicon prices have gone from $9 per kilogram to around $60 now, but the cost to produce this substance has remained relatively intact. Polysilicon manufacturing facilities take two to three years to come on line, with the next plant not expected to come on line by 2008 at the earliest. Demand, however, keeps increasing. Talk about a sweet spot.

MEMC is one of the few companies that makes polysilicon for the solar and semiconductor industries. The solar industry needs polysilicon for its photovoltaic (PV) cells, and the semiconductor industry needs it for its chips.

In 2005, when the chip industry went through a glut in supply of polysilicon, the solar industry took the excess capacity. Now the chip industry needs more, and it's just not there.

The solar industry is set to grow from $11.2 billion in 2005 to $50 billion in 2015. However, I believe the real growth of the solar industry will come when more polysilicon becomes available. Suntech Power Holdings (STP Quote) and Evergreen Solar (ESLR Quote) are both trying to find ways around the shortage by either buying polysilicon manufacturing or developing a way to use less of the material in their PV cells.

The play here is MEMC, which has a 47% return on equity and very little debt. With a forward multiple of just over 15 times and growth next year pegged at 20%, MEMC is in the sweet spot. Consensus estimates have been raised almost 10% in the last 90 days for next year, the same for this quarter and this year's estimates as well.

MEMC is also starting to produce its own solar wafer for sale, increasing margins even further. MEMC is a great growth story that will also have multiple expansion due to its unique position in the industry.

Since hitting a high of $48.90 on May 8, the stock price has pulled back over 30% to the low $30s. I believe you will be extremely happy in the long term buying this stock.