re. what shorts were doing, here's all I know (and I am not endorsing the opinions appearing below):
When the market staged a short-lived rebound in early March, Mattson's stock actually advanced 25%, to almost $17. The bulk of short selling probably took place at those trading levels. All in all, from the middle of February to the middle of March, the cumulative short interest position in the stock rose nearly 40%, to 1.2 million shares (approximately 9% of float). Mattson closed at $15.13 on Friday.
We believe there are two principal reasons behind short sellers' sudden interest in the stock. First, it may have to do with acquisitions completed earlier this year. Although the purchase of CFM Technologies and the semiconductor equipment division of Germany's STEAG Electronic Systems is expected to significantly strengthen Mattson's position in this market, attaining the ultimate objectives may not be painless, as research suggests.
"Although the new entity will likely benefit from synergies in the combined firm, gross margins are expected to decrease significantly…," wrote J.P. Morgan H&Q's analyst, Eric Chen. He modeled a 590 basis-point sequential decline in gross margin, to 45.5%, in the first quarter (ending on March 31).
Another argument in favor of the short side is that Mattson may be unable to successfully integrate new acquisitions in the midst of the slump in the semiconductor sector.
Shorts may also see opportunity presented by the adoption of the SAB (Staff Accounting Bulletin) No. 101. The standard requires companies to recognize revenue upon shipment, title transfer and installation of a product. Prior to the adoption of SAB No. 101 in the fourth quarter, Mattson booked revenues at the time of shipment.
The new recognition standard produces a sizeable difference between revenues reported using the SAB 101 accounting and sales that are based on the old method. For example, in the fourth quarter (ended in December), Mattson showed revenues of $62.3 million recognized in a traditional manner and only $47.9 million based on new accounting method.
It seems that the marketplace largely continues to value Mattson based on the old method of revenue recognition accounting, as can be evidenced from the stock's current trading levels.
It is important to note that two of the three analysts providing coverage on the stock reduced their earnings estimates for the company by nearly 50% in the last month. Based on data compiled by First Call, Mattson is now projected to generate earnings of only $0.35 per share this year. This forecast implies that the stock is currently valued at whopping 43 times the 2001 estimate. In our view, the present valuation is not sustainable -- especially at a time when many more established semi-cap equipment makers have been getting their ears lowered.
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