Dear Lakhani- This what I said on May 5, 1997- Why I like ASYT KLIC UTEK? Are these stocks still undervalued since we first discussed them on this thread? Lets see if we can still put our money safely in these stocks? If INTC beats the market, these stocks on fringes will benefit the most see why:
Subject: "IDEA OF THE DAY"-Trading in&out for profits.
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To: +IQBAL LATIF
From: +IQBAL LATIF May 5 1997 4:32PM EST
Reply #26 of 1779
Ample opportunities for party late comers-UTEK AYST KLIC are still available at good valuations for party late comers. READ THIS
Current Favorites
3-year vs. S&P
Ultratech Stepper
SpeedFam
Teradyne
Asyst Technologies
Kulicke & Soffa
LTX
Brooks Automation
PRI Automation
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Traditionally, Wall Street has misunderstood the potential for earnings growth in the semiconductor equipment industry.
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Chipping Away at Equipment Makers
Companies that make the tools to make semiconductors are in the doldrums again. But the $26-billion industry has some potential winners for patient investors. Gear up for wire bonders and wafer polishers.
By Carl Johnson
Wall Street has always had a love-hate relationship with the semiconductor industry, seldom affording boom-and-bust chip makers like Intel Corp. (INTC) or Atmel Corp. (ATML) high earnings multiples despite their spectacular growth over the past 30 years.
But the Street has had an even worse relationship with the vast industry that makes complex precision tools for the semiconductor manufacturers, fundamentally misunderstanding their potential for earnings growth at critical times.
One of those times of misunderstanding is happening now: In the midst of what can only be called a bear market for most technology stocks, shares of semiconductor equipment companies like Ultratech Stepper (UTEK) and Asyst Technologies (ASYT) are truly bargain priced -- offering real opportunities for courageous investors willing to put in a few hours of study.
Consider the wide vacillation in investor sentiment only in the past 18 months. In late 1995, the global semiconductor industry was nearing the end of an enormous expansion of capacity. Yet even as the expansion showed clear signs of weakening, over-exuberant traders pushed semiconductor equipment makers' prices to the sky. The fallout came in 1996 when a correction drove the prices of many companies to lows they had not experienced since 1992. By the end of the year, the industry hit bottom. And then suddenly, by March of this year, stocks like Applied Materials (AMAT) and KLA Instruments (KLAC) were sizzling again.
That was a time of wrong-headed bingeing. Then came the inevitable purge. A plethora of weak quarterly earnings reports -- and some very cautious statements made by Lam Research (LRCX) to securities analysts during their quarterly conference call -- have freaked out traders again.
But any investor with any sense could have expected weak earnings in the quarter: Several research groups, such as the industry trade consortium SEMI, were for weeks reporting shipments of semiconductor equipment off 40% from the previous year's levels before Lam chief executive Roger Emerick told analysts that the semiconductor industry still had to work off excess capacity. Emerick said a full-fledged recovery would probably not begin until the middle of 1998.
Specifically, SEMI reported that worldwide billings for semiconductor equipment in 1996 totaled $26.3 billion. For 1997, SEMI estimates a 5% trimming, with billings falling to $25.3 billion. SEMI is not alone in its outlook for near-term weakness. The industry research organization Dataquest is looking for a 15% plunge in equipment sales this year.
Yet these are only short-term outlooks, and long-term investors should pay more attention to the terrific history of growth in the industry. Applied Materials, the world's largest semiconductor equipment company, has said in recent analyst conference calls that it expects the semiconductor equipment industry to grow to more than $35 billion in billings by 2000. That forecast concurs with the outlook from VLSI Research, an outfit that has accurately tracked the semiconductor equipment industry for more than 15 years. VLSI analysts expect the industry's sales to grow to over $40 billion by the turn of the century.
Key components of this furious growth will be leading-edge equipment from fast-evolving firms. How fast? An Intel representative at a recent plant christening in Fort Worth, Texas, stated that the average useful life of semiconductor equipment in their facility is about three years. Intel must constantly replace its tools to maintain its technological advantage over hard-charging competitors like Advanced Micro Devices. When today's high-tech marvel quickly becomes yesterday's rusty old junk, new opportunities are constantly created for the most nimble equipment makers.
The Devil in the Details
To assess the best investments, it is necessary to understand the step-by-step process of semiconductor manufacturing. Each segment of the equipment business addresses different areas of the chip-fabrication process, so a tabulation of orders for all new equipment should only play a small role in the measurement of the health of any single company.
The industry is typically segmented into three broad areas: Front-end wafer-processing equipment, test equipment and assembly equipment.
1.The first includes companies that make products used to create complex circuit designs on silicon wafers through processes with exotic names like chemical vapor deposition, physical vapor deposition, chemical mechanical planarization and photolithography. The group includes such well-known firms as Applied Materials, Lam Research, Novellus Systems (NVLS), KLA Instruments (KLAC), Tencor Instruments (TNCR), Silicon Valley Group (SVGI) Ultratech Stepper (UTEK), Integrated Process Equipment (IPEC) and SpeedFam (SFAM).
2.Test equipment makers sell the highly sophisticated tools that evaluate the performance of such brand-new semiconductors as Intel's Pentium Pro. Leading suppliers are Teradyne (TER), Credence Systems (CMOS) and LTX (LTXX). Companies like Electroglas (EGLS) make devices called wafer probers that handle the silicon during the testing process. Also fitting in the category are firms like Cohu (COHU), Aetrium (ATRM) and Aseco (ASEC), which make equipment that hold chips during the testing process and test the finished devices.
3.The assembly process involves the attachment of wires to the semiconductor and encapsulating it in a ceramic or epoxy package. These wires, or pins, enable the encapsulated device to be placed on a circuit board. In this segment, there is only one large domestic player, Kulicke & Soffa (KLIC).
To determine what's really going on in each category of semiconductor equipment, an investor must scrutinize the book-to-bill report for North America released each month by SEMI. Basically a sales-growth estimate, the ratio for the entire industry is reported by most financial wire services. But SEMI also breaks down the report into ratios for the three major categories of semiconductor equipment makers in a report generally sent only to subscribers. It is here that the real trends behind the industry's current capital-spending programs can be found. Because these segments have periodically diverged from each other, serious tech investors need to develop an awareness of the statistics in each category.
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It is ludicrous to take cautious, forward-looking statements from a company like Lam, and conclude that business conditions must be weak for an assembly company like Kulicke & Soffa.
Evidence of the difference in buying patterns between these three sectors is fairly easy to see in a chart like the one above. It's clear that spending on the front-end equipment made by giants like Applied Materials and Lam has been rising disproportionately over the past several years -- well ahead of test and assembly. Indeed, test and assembly have remained relatively flat as a percentage of chip sales.
But it's that large sales bump in front-end wafer processing equipment that resulted in the paralyzing current situation of excess capacity in the industry. The existence of way too much manufacturing capacity -- which is most acute among makers of memory chips, like Micron Technology (MU) and Texas Instruments (TXN) -- is largely behind the slower-than-expected recovery for front-end equipment vendors. They sold too much of a good thing, and now they're paying for it.
An example: The two largest front-end companies, Lam and Applied, generated 40% of their revenues in the recent past from sales to memory producers. Most experts believe it will be at least mid-1998 before those memory manufacturers embark on an aggressive new program to expand their plants.
The test and assembly sectors of the industry, typified by such companies as Kulicke & Soffa and Teradyne, did not reach nearly the same level of overcapacity, so they are recovering much sooner. And these companies don't sell just one high-priced piece of equipment per plant -- they sell more of their stuff as the demand for semiconductors increases: If Intel doubles production of its Pentium Pro, it might double its orders for wire bonders from Kulicke & Soffa even as it continues to use a single Lam front-end box.
The message should be clear: It is ludicrous to take cautious, forward-looking statements from a company like Lam, which supplies tools to the front end of the semiconductor manufacturing effort, and conclude that business conditions must be weak for an assembly company like Kulicke & Soffa. Instead, the opposite is true.
Choosing Potential Winners
In November, Applied's management beamed with optimism during a conference call with analysts, and the sector took off on a resounding rally.
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SpeedFam specializes in polishing silicon wafers. It is the only company in this field to consistently bring profits to the bottom line.
Even though its leading competitors are warning of a delay in the recovery of front-end equipment sales, Applied's shares have recently been added to the strong-buy lists of many Wall Street firms. The wisdom of those moves is yet to be determined. Among front-end companies, leading analysts believe Ultratech Stepper and SpeedFam have bright futures and are more attractive at the current quote.
Ultratech is a talented, diversified company that supplies photolithography tools used to project a circuit pattern on the surface of a silicon wafer. The company is developing several leading-edge products and also dominates the market tools used for micro-machining and the production of thin-film heads for today's high-density disk drives.
SpeedFam specializes, essentially, in polishing silicon wafers. Their process -- called chemical-mechanical planarization, or CMP -- smoothes the surface of the wafer until it is ultra-flat. As the feature sizes of the patterns placed on silicon become tinier, variations in wafer flatness create depth-of-focus problems for photolithography machines. SpeedFam is the only company in this field to consistently bring profits to the bottom line. Most industry experts agree that CMP will be the fastest-growing area of the front-end equipment segment until the turn of the century.
In the test-equipment segment, investors should consider exposure to Teradyne. It is the largest company of the group, and reported quarterly results April 15 that were in line with expectations. Bookings increased to more than $330 million and were stronger than even the most optimistic forecasts. The increase in bookings speaks volumes about the state of the test segment. Investors more inclined toward lower-priced stocks should consider LTX, which is largely focused on equipment used to test mixed-signal and analog devices. Mixed-signal and analog devices come in variety of configurations but are mainly used by the telecommunications and data transmission industries.
In the assembly sector, Kulicke & Soffa just reported an excellent quarter and the shares have the potential to move significantly higher. The company is currently reaching a production level that rivals its output at the peak of the last capital-spending cycle.
As advanced as the semiconductor manufacturing process might appear many production facilities are just beginning to automate the movement of wafers.
Another Angle: Automation Companies
Specialized areas of the semiconductor equipment business are poised to grow robustly even though total capital expenditures will decline this year. A very compelling case, for instance, can be made for fast growth in companies that supply automated wafer handling and transportation systems.
Industry experts have estimated that over 70% of the money spent to build a plant goes into buying the equipment. But the industry trade consortium Sematech has estimated that wafer-processing tools are only used 40% of the time to produce a finished product. Sematech noted in the same study that 20% of the time, these expensive tools were not processing wafers because there were no wafers available to be loaded -- or because tools or operators were not present.
As advanced as the semiconductor manufacturing process might appear, indeed, many production facilities are just beginning to automate the movement of wafers. In many facilities, silicon wafers are actually delivered and loaded into processing tools by humans -- a highly inefficient activity.
In an average 100,000 square-foot manufacturing facility, a silicon wafer will travel as many as six miles between process tools. Without automation, declining manufacturing yield is nearly inevitable. With today's state-of-the-art semiconductor manufacturing plant costing well over $1 billion, it has become increasingly important for chip-makers to automate in an effort to maximize the use of its tools.
Three publicly traded automation companies merit the attention of investors: Brooks Automation (BRKS), PRI Automation (PRIA) and Asyst Technologies (ASYT). Of these, PRI has been the best performer recently -- but Asyst and Brooks are cheaply valued at their current quotes.
Asyst is currently trading at less than 10 times earnings estimates for 1997. Wall Street has been nervous about the stock because the company reported some disappointing results recently. Those problems are being addressed by management, however, and should now be behind the company.
Even though earnings season for the equipment makers is shaping up to be rather dismal investors should be on the lookout for blue-light specials.
Brooks sells to 44 of 64 front-end equipment companies. Its dominance of the wafer and flat-panel-display handling business will drive earnings in the future. The company announced a loss in the latest quarter, but many analysts believe future implementation of its technology will drive earnings and revenues much higher over the coming years.
Keep Looking Forward
In summary, even though earnings season for the equipment makers is shaping up to be rather dismal -- and the next six months look like nothing to write home about -- investors should be on the lookout for blue-light specials.
The semiconductor manufacturing process has never been static for extended periods of time. Semiconductor-construction technology is on an evolutionary path highlighted by increasing complexity, smaller feature sizes and larger silicon wafers. The successful equipment companies will be ones that consistently provide tools that meet their customers' technology requirements while enhancing their productivity.
Wall Street is not entirely efficient at processing information about these firms. Traders are bound to wrongly beat up shares of excellent test, assembly and automation equipment makers -- like Teradyne, Kulicke & Soffa and Asyst -- along with the entire equipment group, even though they're likely to weather the downturn quite nicely. These stocks are likely to snap back smartly when Wall Street overcomes its short-sighted view.
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