Started a new position in AXTI:
From S+P
Overview 08-FEB-02
We expect revenues to decline 37% in 2002, based on our expectation that end markets for AXT's gallium arsenide (GaAs) and indium phosphide (InP) substrates, including wireless telecommunications and optical communications, will not grow until the second half of 2002. We then expect revenues to grow by over 50% in 2003, led by strength in GaAs and InP substrates, as well as by AXT's rapidly growing high-brightness LED division. While substrate sales fell sharply in the fourth quarter, LED sales soared 70% from the preceding quarter, to 25% of revenues. On the substrate side, AXT's vertical gradient freeze technique, which allows it to make larger diameter wafers with lower defect density than competitors, should enable it to maintain its leadership position. The company also continues to transfer a significant amount of its manufacturing to China, and in February announced a joint venture gallium extraction business in China (gallium is the key ingredient for its GaAs wafers), both of which should substantially reduce costs. We project a loss per share of $0.29 in 2002, followed by EPS of $0.55 in 2003.
Valuation 08-FEB-02
The shares have recently fallen to levels not seen since the beginning of 1999. We attribute the decline to concerns over the possible timing and strength of a recovery in AXTI's core communications end markets, in particular for fiber optic electronics and cell phone chips. Cell phone sales have begun to increase and, with R&D work continuing in fiber optics, we expect sales to increase later in the year. The shares recently traded at 1.9X sales and 1.3X book value, both low valuations by historical measures and as measured against the industry. Based on these low valuations and definite signs of improvement in the overall electronics market, we recently raised the shares to accumulate from hold. |
