For many investors and traders, the name SunEdison Inc (SUNEQ) is associated with the high-flying renewable energy company that flew too close to the sun.
That SunEdison took on way too much debt in an effort to be all things solar and grow huge to compete with the big boys. Ultimately, that debt proved too much and the firm was forced to file for bankruptcy.
But it’s not the only SunEdison out there.
In this case, we’re talking about its smaller and much quieter sister SunEdison Semiconductor Ltd. (SEMI).
SunEdison Semi was pretty much ignored, as investors chose to focus on the sexier renewable energy firm. However, this SunEdison may turn out to be a diamond in the rough — especially if some of its strategic plans take hold.
A Tale of Two SunEdisons
Back in the early days of tech, MEMC Electronic Materials was one of its biggest stars. The firm made a host of silicon wafer products — basically the building blocks for all semiconductors.
After the dotcom boom/bust, MEMC saw it grow slow as overall semiconductor demand fell. The firm branched out into other semiconductor items, including solar panels and LEDs, via a buyout of then-private firm SunEdison. With solar power being the future, MEMC rebranded itself as SunEdison.
Bowing to investor and activist pressure, SunEdison decided to cut loose its “boring” and slower-moving silicon wafer products to focus on solar. SunEdison Semiconductor was born.
And it turns out that boring was the way to go.
While SUNE has gone the way of the dodo thanks to overreaching expansion plans, SEMI is still churning out wafers to end users like Intel Corporation (INTC) and other semiconductor manufacturers.
Now, things haven’t exactly been going SEMI’s way in recent quarters.
The unfortunate thing for SunEdison Semi is that as the producer for the backbone for chips, you’re heavily tied to the health and cycle of the industry. Semiconductors are notoriously cyclical. Major producers like Intel or Texas Instruments Incorporated (TXN) can move through the downturns due their huge product catalogs and focus on high-tech semis. For SunEdison, not so much.
So the last couple quarters have shown for a loss as prices for wafers have dropped hard on slack demand.
Those losses — as well as selling pressures due to solar SunEdison cutting its stake in SEMI to 0% in an effort to raise cash — have pushed down shares hard. Over the last year, SEMI stock has fallen 80%.
However, that could be just enough of a loss to spark interest from deep value hounds.
A Potential Turnaround for SEMI Stock
For SEMI, the storm clouds aren’t nearly as dark as they were SUNE — not by a long shot. That’s because the firm has made good on its debt.
Unlike SUNE, SEMI has managed to reduce its debts since becoming a separate entity. And at the end of last year, it refinanced much of its legacy debt held through the spin-off. That’ll help lower future interest expenses, enhance its capital structure flexibility and improve its various covenant coverages.
Secondly, the cycle for semiconductors may be once again growing. SunEdison Semi saw a slight upswing in sales this past quarter as more customers ordered large-diameter silicon wafers. With a larger wafer, end manufacturers can produce more products per wafer.
Early rises in orders here can mean that semiconductor manufacturers are gearing up for the next up trend in demand.
SunEdison’s focus on technology and leading designs haven’t hurt either. Ultimately, more wafer sales should help SEMI overcome its losses.
Also helping on this front have been efforts to reduce operating costs and boost profit margins. That includes ways to balance polysilicon supplies through multiple sources as well as building up significant inventories. These efforts and manufacturing cost reductions helped save the day and reduced the losses for the quarter.
All in all, when things are finally moving and grooving, these efforts will translate into bigger and better things for SunEdison.
Making a Play for the Smaller SunEdison
Given how beaten down SEMI is versus its potential to succeed, investors may want to take a gamble on the small-cap stock. Keep in mind, this is a turnaround play. It’s going to take a few quarters or even a year or so, before the ball gets rolling at SunEdison Semiconductor. The difference is, the turnaround has already begun and SEMI has the ability to survive until it does. Unlike its former solar parent.
That is, if it gets to execute on its plans.
Already, several private equity firms and other institutional investors have seen the value in SEMI stock. SunEdison received several “unsolicited preliminary indications of interest” back in February. While no one has made a direct offer, this is the first step on the “exploring strategic alternatives” and “put us for sale” path. If that happens, today’s investors will make a very quick buck indeed.
If it doesn’t, SunEdison should be able to capitalize on its turnaround plans and actually regain profitability.
Bottom line? Forget about the solar SunEdison. SEMI could be the better choice over the longer term.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned stocks.
