Here is a scary thought:
The sum of the Market Capitalizations of AMAT, KLAC, NVLS, and LRCX (CMCAMATKLACNVLSLRCX) is roughly $74.92 Billion. SEMI estimates call for the entire Wafer Fab Equipment (WFE) market to reach $38.1 Billion in REVENUES in 2002.
This is a touch disconcerting in my opinion. The combined market cap of these four big, North American chip equipment folks (again, the CMCAMATKLACNVLSLRCX) is roughly 2x's the estimated total addressable market two years hence (and two years in this industry, as we have learned from the past, is equivalent to 14 human years).
Let's take this a step further. Assume that in 2002, only these four players remain (sorry TEL, ASML, TER, VSEA, ...). This massive consolidation/trimming-of-the-ranks has made the industry far more profitable. The entire business generates 30% Operating Profit Margins (EBIT). That rosey outlook means, that the industry will generate $11.4 Billion in EBIT in 2002. That is roughly $9.24 Billion in today's dollars (n=1.5, %=15). That works out to an 8.1 multiple to EBIT (12.3% cap rate).
Assuming that these companies will pay taxes (appropriate on Estimated Tax Day) at a 30% rate (R&D credits abound in 2002), the discounted after tax operating profit (assume that this equates to Free Cash Flow ... generous in my opinion) is $6.47 billion. [Other income from these big balance sheets offsets working capital requirements and stock option dilution ... very generous in my opinion.]
Using an after-tax scenario, the CMCAMATKLACNVLSLRCX is 11.6x's the discounted, after-tax generously-estimated operating profits of the entities. That works out to be an 8.6% cap rate
There is much that can be said about my methodology. If you back out AMAT, the CMCKLACNVLSLRCX is only $23.6 Billion and all your later estimates are way too high? In fact the CMCKLACNVLSLRCX appear far too low. You are using too high a discount rate? You are discounting and capping numbers in a very strange and useless manner? An 8.6% Cap Rate seems cheap for such a growth industry ... look at how much the WFE industry has grown since 1995 ... hmmm ...??? If there were only 4 players, the remaining businesses would generate better than 30% EBIT margins? This is a stupid exercise, Duker, shut up.
Just some 'thoughts' as these stocks soar. WARNING: My opinions have proven useless in the past, and, in this and many other cases, I would assume that it is safe to say that they will prove to be useless again in the future.
--Duker |
