Saturday Group: A Stealth Play (ALSC) While the Chips are Down
By Jono Steinberg (9/23/00)
Intel (NASDAQ: INTC - Quotes, News, Boards) sure dropped a bomb on the markets this week, and one of the stocks at ground zero was Alliance Semiconductor (NASDAQ: ALSC - Quotes, News, Boards). This small-cap maker of memory chips has weathered the peaks and valleys of the latest chip cycle up-swing.
While the stock has still outperformed all of the major indices having gained 14% year-to-date, at $19.50 per share, Alliance is 40% off its June highs.
The company recently pre-announced a strong June quarter, where it posted a profit from operations of $0.13 per share. Revenue came in at $47 million, which was sequential improvement of more than 60%. Going forward, management sees its backlog for the September quarter at more than $100 million, or twice what it collected in sales last quarter.
Alliance continues to improve on its margins through raising prices and squeezing operating costs. It's worth noting that Alliance only gets about 19% of its business from Europe - - which is the source of Intel's current trials and tribulations - - and 13% of its products are sold to the computer end market.
But the reason I'm really high on Alliance is the hidden value of its investment arm - - Alliance Venture Management. The company started making strategic investments in 1995, primarily in Taiwan and Singapore. Through successful operating growth and acquisitions Alliance has seen its investments grow to a value $1.3 billion.
The company however, sports a market capitalization of only $800 million, which is a 40% discount to the value of its investments and $45 million in cash that it had at the end of the June quarter.
That said, you're essentially receiving the firm's blossoming and profitable memory chip business for free. In my mind, that makes Alliance one of the best values in the stock market today, no matter what size company we're talking about.
Alliance's largest holding is a 68 million ADR stake in United Microelectronics (NYSE: UMC - Quotes, News, Boards) , in which the company invested about $70 million between 1995 and 1997. At Friday's closing price of $14 per share, the stake is now worth $952 million on the market.
Alliance also holds about 1.6 million ADR's of Chartered Semiconductor (NASDAQ: CHRT - Quotes, News, Boards), worth another $105 million.
But the company's investment portfolio is not all tied up overseas, as it holds shares in Vitesse Semiconductor (NASDAQ: VTSS - Quotes, News, Boards), Broadcom (NASDAQ: BRCM - Quotes, News, Boards) and PMC Sierra (NASDAQ: PMCS - Quotes, News, Boards) worth about $196 million. Alliance received all of these shares as a result of these larger firms buying out the stock more speculative plays that the company had invested in.
In fact, management currently has an additional 87% of Alliance's $135 million available new venture money committed right now. This figure includes a $75 million investment that the company announced in August in the Israeli company Tower Semiconductor. Alliance acquired a 10% stake in Tower, which will use the money to help build a $1.5 billion plant to supply the industry with chips.
Getting back to the core business, Alliance is already booked through the end of the calendar year for production of its DRAM. Demand is also strong on the SRAM side, and the industry-wide shortage of these goods in only helping the company's top line.
Management also plans on beginning the shipment of its new flash memory products in the September quarter, and is targeting $1million in revenue for this period. The company has struggled in the past with the production of flash memory, but we plan to hear in the next conference call that the Alliance is successfully optimizing its capacity without affecting the core business.
The only industry slowdown that Alliance is feeling is in its stock price.
Given Alliance's public and private equity holdings, we believe that investors are very well protected investing in the company's core memory businesses. The consensus of two Wall Street analyst's estimates has the company earning $0.76 per share from operations in fiscal 2001(March), but we believe that continued strong demand for Alliance's products could push this figure to at least $0.80.
The fact that only two analysts actively cover the firm has likely been a drag on the stock price, because most investors would probably want to jump all over the value that Alliance presents, once the story becomes more publicized.
Assigning a multiple of only 15 times the current earnings estimate yields a value of $11.40 per share for the core business. This is at the low end of five-year historical valuations, and a 40% discount to Alliance's projected long-term growth rate, but it still yields a fair value of $43 per share once you factor in the company's equity investments.
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