to all: I hope I will not not get in trouble with the wsj.com
regards,
Alfredo
Chips Are Down
By RHONDA BRAMMER
It's easy, of course, to say you're a contrarian -- to brag that you're
independent enough to assay value for yourself, strong enough to ignore
the ebb and flow of the stock market. It's quite another thing to coolly
plunk down your hard cash for the beat-up stock in the out-of-favor
sector, while virtually everyone else is racing for the exit. Always comes
the nagging worry: What if you're way too "early" or, worse yet, plain
wrong?
A group last week that found itself the target of growing investor unease
was semiconductors. On Wednesday, Micron plunged $9.50, or 12%, to
$68.75. And that, as it happens, was smack on the heels of Intel's 6% decline
on Tuesday. Analysts warned of slowing demand for chips and sagging
prices.
Two big chip makers downgraded in the space of a couple of days was
enough to send the whole tech sector into a tizzy. And though the stocks
recovered some on Thursday before stumbling again in the closing session,
the unnerving episode was reminiscent of a day in early July when a
Salomon Smith Barney analyst shook up the semis by publicly fretting that
the industry might peak in six months. He cited a slow build in inventory, a
smattering of price declines and evidence that hard-to-find chips were
suddenly not so hard to find.
Bad news for chip makers, of course, is never glad tidings for
semi-equipment makers and their stocks. Some of these issues had already
taken a beating earlier in the year after a few customers decided they'd
rather have their orders filled later than sooner.
But when we rang up Scott Black of
Delphi Management-Barron's
Roundtable member and
card-carrying contrarian -- to sound
him out on what he thought was
really cheap on the smallcap front,
we got an earful about those very
same semi-equipment makers.
Scott likes low-multiple stocks with
lush cash flows and solid balance
sheets. His accounts, on average,
are up over 20% this year. He has
never been shy about buying when
the rest of world is dumping.
He's doing just that with two small-cap producers of chip equipment that
he finds "incredibly cheap." Off 60%-70% from their highs, they have been,
as he puts it, "absolutely blown away."
What prompts him to plunk down good money for these humbled stocks in
a suspect industry is his firm belief, grounded in his own research and
extensive conversation with major companies in the field, that the
equipment cycle is destined to last a good deal longer than people expect.
And just why does he think so?
For one thing, next year a slug of new capacity is slated to come on stream:
world-wide, 11 new fabrication facilities. For another, by late 2001, he
foresees the start of the giant migration from 200-mm to 300-mm wafers,
a move that will "really ramp up in 2002."
Equipment sales will probably climb 35% in 2000, from '99, Scott reckons --
clearly a banner year. But, more important, he has them growing a robust
25% next year. "Applied Materials is the Big Kahuna of the whole industry.
Their order rates," he reports, "are going through the roof and they really
drive this whole business."
So which pair of chip-equipment stocks is he particularly hot on?
Kulicke & Soffa Industries, for one. It ranks as the world's largest maker
of assembly equipment, with over half of revenues coming from wire
bonders.
The No. 1 supplier of this critical equipment in all geographic regions
except Japan, the company boasts about 70% of the U.S. market and
roughly 33% worldwide.
Demand for this gear, however
vital, is nonetheless notoriously
cyclical. Well aware of that
melancholy fact, investors -- at the
faintest sign of a slowdown -- are
quick to unload. And early last
month, when the company disclosed
that an unnamed customer had
requested a delay on the delivery of
some 200 wirebonders, the stock got
hammered, trading under 14.
It has since recovered to 15 and
change, but that's still a heap of
points below the March peak of 43.
In the space of seven months, Kulicke's stock-market value has been sliced
from $2.5 billion to about $900 million.
The selling in this premier tech company, Black insists, has simply been
overdone.
He stresses that operations remain vibrant, even though the fourth
quarter, ending this month, will not match the splendid June quarter.
"Business is still very strong," Scott relates, "and it's broad-based; no one
customer is even 10%."
Still, the first half of fiscal '01, ending in March, will at best be roughly flat
with this year's second half. And we couldn't help wondering aloud if
postponed deliveries might not prove to be cancelled ones.
"The unnamed customer was ASE Inc.," Black says, "one of the fabs over in
Taiwan." He contends the equipment will eventually be delivered and that
ASE's delay is not the onset of a wave of postponements.
So while for this fiscal year he's looking for $1.95 a share, in the second
half of next fiscal year he predicts that brisk growth will resume. His
estimate for September 2001 is $2.65 a share, a dime higher than First
Call's consensus of $2.55.
"That's 5.8 times earnings," he points out. "This stock is discounting the
end of the world."
Obviously, everything depends on those anticipated earnings
materializing. If they fail to, the stock will head lower. Book value is less
than $7 a share.
"You don't have to worry if the business sputters for a quarter or two," he
assures us. "This company has an absolutely bulletproof balance sheet."
And a quick glance reveals that cash and investments handily outweigh
debt.
Just as equipment stocks plunge on any whiff of weakness, they take wing
at the first sign of strength. In 12 months, Black suggests, shares of Kulicke
& Soffa could be selling at $40.
Down nearly 70% from its high, the stock of Applied Science & Technology
fetches $15, giving the firm a stock-market value of some $200 million.
Shares got creamed last month when the Woburn, Massachusetts-based
company surprised Wall Street by announcing that revenues in its first
fiscal quarter, ending this month, would be lower than the blockbuster
showing in the three months ended June. And, worse still, it declared that
earnings would be flat to down slightly -- again, compared with the three
months ended June.
Worth noting, however, is that the first quarter is a week shorter than the
fourth, and the pause in profits is largely a result of stepped-up investment
in R&D.
With the stock selling around 12, management was roundly criticized by
one analyst for its failure to "quantify and communicate" so Wall Street
could "establish clear expectations." Even so, however, he noted that the
first fiscal quarter would likely be the low point, after which sales and
earnings would again grow steadily. And in the very last line he mentioned
that "long-term investors" might accumulate shares "for a reduced
12-month price target of $28."
From $12 to $28 in a year! Maybe we're incorrigibly conservative, but we
think that's a dandy return.
Applied Science is a great little company that's in precisely the right spot,
Scott notes. "About 52% of sales goes to Applied Materials and their
business is just terrific."
What Applied Science makes are reactive gas-processing solutions and
specialty power sources. In the fiscal year ended June 2000, on nearly 80%
higher revenues, the company netted $1.09 a share, versus a loss of 13
cents a share in the prior year.
For fiscal '01, with growth accelerating in the second half, Scott sees
Applied Science earning $1.40 a share, roughly a 30% gain from fiscal '00.
If he's right, the stock -- at $14.50 -- is going for about 10 times earnings.
Congenital skeptic that we are, nevertheless we can't see a heck of a lot of
downside here. Book value is almost $11 a share. And there's some $90
million, or about $6 a share, of net cash in the corporate till.
Scott expects the stock to nearly double in 12 months. |
