I have done some more research on KEI, and have developed some opinions which I'll pass along.
To begin with, I am not convinced that the semi-equip industry faces exceptionally strong growth for the next few quarters although the entire semi industry is looking at more rather than less growth. There still are reports of excess capacity and not enough chip demand to fill the gaps. Motorola and SGS Thompson continue to report softness and there is an abundance of capacity for memory. The push to 300 mm wafers continues but Datquest believes the whole 300mm thing won't gain steam until 98-99. The folks at Infrastructure seem to concur.
The company itself reported reduced sales of semi-equipment over the previous quarter eventhough orders are reported to be strong. Test equipment that will increase productivity is the play on the whole sector, and KEI has it.Sales have been strong in N America yet the fab activity is taking place in Asia!? So prospects seem encouraging. I'm not sure about the telecommunications equipment, but that is a long term growth story also. Part of the difficulty is the inabilty to break down revenue by product segment.
My database which is almost 3 mos old indicates that estimates for the current year are(were) .20, down from.21 the previous month. The new Zak's estimate is .17, but the company missed earnings by a penny.So there is some uncertainty about earnings stability which the CEO himself confirmed. At.56 for next fiscal year the company is trading at about 18x next year earnings. A little pricey, especially given the uncertain earnings visibility.When I get updated info in the next couple of weeks, I'll have a much better feel for the numbers.
Another way of valuing the company is to determine the ratio of net profit margin,NPM, to Price/Sales. The "market" historically assigns a ratio of about 5:1 to this relationship. The same exists for the ratio of ROE to Price/Book. About 5. So based on this, an adjusted NPM of 3.4% which is last quarter NPM plus the extraordinary charge for moving divided by .72 which is the P/Sales, and I have 4.58. Still pretty overvalued.
Another ratio which I look at is the Shareholder Equity/Sales. When this ratio drops quarter over quarter, it is an indication of some internal problems and typically the stock will fall also. This ratio fell from 2.56 to 2.30. so although sales and earnings show improvement, they are not out of the woods. I would buy the stock around 9.50 however.
It's a mixed bag! recent earnings reports from test companies have been very good, but there was a lot of insider selling in the semi-equip industry this summer, this being a barometer of sorts for industry prospects.I recently sold the last of my semi-equip holdings and did miss the run up in COHU and Helix. I missed the recent run up in NVLS also, but I feel genearally that those stocks were overextended, as is the market as a whole. I just don't know anymore!
In short, I like the story, the improving financials,the institutional sponsorship,and inside ownership, but it seems over priced to suit my tastes and the low trading volume also is a deterrent. But I'm going to keep my eye on it! |
