Hi David again<g><
Here's some stuff to digest.......FOOL ON THE HILL
An Investment Opinion by Randy Befumo
Asian Contagion Claims Another
Semiconductor capital equipment companies underwent a savage beating today as investors fled
industry uncertainty. A profit warning from Kulicke & Soffa (Nasdaq:KLIC - news) as a result of
continued economic turmoil in Korea initiated today's debacle. Investors are concerned that
economic upheaval in East Asia and Japan could cause spending for semiconductor capital
equipment to dry up. Imploding currencies, massive debt loads, and slowing economies throughout
the region could all contribute to lower capital spending. Many investors figure that if major Korean
manufacturers like Hyundai are choking right now, things will only get worse in the future.
Since the late October turmoil in Southeast Asia, semiconductor capital equipment manufacturers
have been under pressure. The average semiconductor equipment manufacturer in the Motley Fool
Semiconductor Capital Equipment Universe has dropped 14.0% so far this month. Even more
shocking is the 38.6% haircut the average company in this group has seen since the fourth quarter
began on October 1. Although as a whole these companies are still in positive territory for the year
with a 24.1% average return, at this point these companies have underperformed the S&P 500's
total return of 34.9%.
Kulicke & Soffa re-ignited tensions this morning when it reported that it would not make fiscal first
quarter earnings estimates $0.38 per share. The largest manufacturer of wafer assembly equipment in
the world said Hyundai and another unidentified Korean customer had pushed out orders for 110
wire bonders, reducing first quarter sales by approximately $9 million. Hyundai now wants 80 of the
bonders in question to be delivered in February, although these orders could be further delayed. The
other 30 bonders are pretty much toast, as the company that wanted to buy them could not get a
letter of credit. In addition, Kulicke is also having some production problems with its 8060 wedge
bonders, which will shave up to $5 million more off the quarterly total.
This is the first concrete sign from one of these companies that the Southeast Asian turmoil is more
than hype. Although many took Oracle's warning earlier in the week as the watershed moment, for
this particular industry the impact on Kulicke is much more relevant. In addition, Lattice
Semiconductor (Nasdaq:LSCC - news) reported today that it had $3.5 million in revenues in
potential jeopardy due to the insolvency of its South Korean distributor. As South Korea is the 11th
largest economy in the world and constitutes about 10% of the sales of all semiconductor capital
equipment, hairline fractures in the corporate infrastructure like this are a real economic event that
creates some concern. Korea's most significant semiconductor export is memory chips. With the
prices on memory chips still under siege and the Korean currency collapsing, it is not hard to see
scenarios where companies like Samsung join Hyundai in pushing-out orders.
Investors who remember the last downturn in semiconductor capital equipment are seeing some
eerie similarities. When Kulicke reported push-outs by Taiwanese customers and problems with its
8020 turbo gold ball bonder in late 1995, this was the first sign of trouble for the semiconductor
capital equipment industry. Although at the time Kulicke declared the issues short-term problems
and continued working on a secondary offering, it turned out they were actually an excellent leading
indicator for a downturn in the cycle. In retrospect, Kulicke's emphasis on the secondary offering
was seen by many investors as an uncanny call on the top for the equity value of the company. As
Kulicke had a three million share secondary offering back in May and now it is having problems with
another key piece of equipment, some believe history is repeating itself.
All of this fear has created the most attractive set of valuations on semiconductor capital equipment
manufacturers in the last few months. With a variety of companies sporting solid balance sheets and
starting to edge toward the low end of their historical valuation ranges, today's turmoil appears to
offer investors the first compelling entry point since late 1996. On a relative basis the larger
manufacturers have actually been hit harder, with Applied Materials (Nasdaq:AMAT - news) ,
KLA-Tencor (Nasdaq:KLAC - news) , and the decently diversified Teradyne (NYSE:TER -
news) all trading for around 2.0 times their enterprise value (price). The five-year lows in the
price/sales for these three companies are between 0.7 to 1.0, while the five-year highs range
between 5.0 to 5.5. Although they have not hit near absolute panic valuations, the South Korean
problems would have to kick off a major slowdown across all semiconductor capital equipment
product lines to justify some of today's prices.
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Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Contributing Writers
Brian Bauer (TMF Hoops), Fool Four
Julia Wilson (TMF Delete), Fool Five
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