More on the Barron's coverage:
Q: How about one you still like?
A: Alliance Semiconductor. They make memory products, SRAM and DRAM, used in cell phones, PC servers and Internet infrastructure in both computers and communications. They sell to 3Com and Lucent and those kinds of folks. A lot of their competitors, like Cypress, are capacity-constrained right now. That is providing those who aren't with a lot of upside potential.
Q: Isn't everybody outsourcing?
A: Alliance is in a unique position. They have a meaningful ownership in a fabricating plant in Taiwan called UMC, which gave them the right to book capacity in advance. That's the reason they made the investment; they anticipated the potential shortage. Its earnings are in the process of exploding as average selling prices rise and gross margins expand. What else is interesting about the stock is that it has got more than its current stock price in the value of its portfolio of publicly traded shares.
Q: It has a venture-capital side to it?
A: It has 850,000 shares of Vitesse, a $59 stock. It has 283 million shares of the UMC fab, whose ADRs trade at $3.50 a share. It has 2.1 million shares of Chartered Semiconductor, whose ADR trades at 67. It has 490,000 shares of Broadcom at $174. The total value of the investments is around $1.25 billion. With 43 million shares outstanding that's about $29 in value in the investments alone. Yet Alliance is trading at 19 1/2 a share. That's fine and well, but in and of itself it would not attract us to the story. We care about surprises. They have little analyst coverage, their current backlog is $74 million, which is about two quarters worth and double the last quarter's. They are going to see sequential revenue growth of 20%. The consensus estimate for the calendar year is 44 cents a share, and we think that's laughably conservative. My guess is they come in north of 60 cents a share. If you get any kind of reasonable multiple, and we're not talking about a bull-marketcrazy semiconductor-multiple but, say, 25 times something that is growing, that 60 cents a share gets you $15 on top of the asset value of $29, and you get an incredibly conservative operating business valuation of $44 a share.
Q: What's the market cap on this?
A: About $800 million. This is probably as down market as we will go on market cap. But the value of the investment portfolio alone is $1.25 billion, and combined with a 25 multiple on operating earnings you are up to $2 billion.
Q: When did you start buying it?
A: We've had it on and off for the past six months. We started getting more aggressive in the past two months. |
