B Tate,
I noticed several posts have already responded to your comments on ALSC. The main problem in trying to analyze the company is that it looks very different if your emphasis is on looking backward rather than looking forward. Before making a summary judgment on their SRAM/DRAM business, it is helpful to understand where they are in a semiconductor cycle. There are times of shortage when chipmakers make money hand over fist. And there are times of gluts when prices decline and chipmakers bleed profusely. We have been going through several years of glut, during which virtually all DRAM companies have looked awful. They have been losing money, many have abandoned the business, and few have made substantial investment in new plant and equipment.
But the demand for semiconductors has continued to grow. The general assessment now is that we are coming into a time in which demand catches up with and begins to outpace supply. The potential for a semiconductor boom has been why both semiconductor and semi equipment companies have been such strong performers (at least in relative terms) lately. Semiconductor companies are trying to increase production to be able to meet higher demand. However, there is a substantial time lag in bringing new semiconductor fabs and equipment upgrades into production. Current projections are for a substantial increase in semiconductor sales with shortages appearing in 2H00.
ALSC's core semi business is currently profitable with a substantial backlog through the end of this year. Management's guidance was for 20%+ sequential quarterly growth in revenues. Since semi companies operate with relatively large fixed costs, that increase in sales is likely to improve margins and contribute to significantly larger gains in earnings.
Another important consideration is that Alliance has significant ownership interests and production allocation rights at UMC and Chartered Semiconductor. With more companies going fabless and contracting their production through semiconductor foundries like UMC, TSMC and Chartered Semiconductor, these foundry companies have become increasingly important in total global semiconductor production. They have been making enormous capital investment in state of the art production facilities that increase both their capacity and their efficiency. Meanwhile, they are showing rapidly growing sales, backlogs and profits. Beyond the value of investments in rapidly growing companies, ALSC's production allocation rights can be extremely valuable, particularly in a tightening supply situation, because they allow ALSC to increase production without further capital investment.
ALSC's substantial investments in quality semi companies like UMC, CHRT, BRCM and VTSS, currently worth about twice ALSC's market cap and growing like weeds, have made it tempting to evaluate ALSC simply as an undervalued holding company selling below its $22.36 book value and way below its net liquidation value. The strength of this kind of analysis is that it is easily quantifiable. The weakness is that it ignores the dynamic growth potential. First, it ignores the growth in the investments themselves. It also ignores ALSC's now profitable and growing core semi business and their venture program -- a valuable long-term incubator program that is hard to quantify in current dollars. Beyond giving them valuable seeds that can provide profitable growth through IPO's, the venture program provides a way of developing new technology on the cheap through ownership interests in a diverse R&D network of small companies.
As a combination value/growth situation, ALSC is one of the most attractive companies around.
If you want more up-to-date information on Alliance, I suggest checking out their most recent earnings report and listening to the webcast of their most recent conference call. The webcast, in particular, will give you a clearer sense of where they are now.
Most recent earnings report:
alsc.com
Webcast available here:
alsc.com
You can also check out the SI ALSC website:
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