Hi Dave,
I emailed the Barrons editor some info on CBXC and requested that he pass it on to Rhonda Brammer for her consideration in a future "Sizing Up Small Caps". A column on CBXC would give us all something to smile about...
OFF THREAD STARTS HERE
Before talking about EGLS (or any semi-equip stock) I should say that this is not one for the feint of heart. If you look at the chart for EGLS over the past few years, it's enough to make you think twice: 15 to 40, 40 to 12, back up to 35, back down to 13, and now clawing its way (thanks Barrons) back to 18. That being said, I think EGLS is probably one of the best plays in the world (and not un-coincidentally, much of my portfolio is in it). Since you already know the numbers, I'll give a qualitative analysis of ELGS.
The microchip is as steel was at the turn of the century: the future will be built with it. Not just CPU's, but DRAMs, ASICs, PROMs, and a host of other acronyms I can never remember. They're already in your phone, your car, your TV, your stereo, your microwave, and, well, you get the idea; and this is just the beginning. As for which CPU vendor or chip supplier will become dominant, I haven't a clue, and would not risk any money on any of them because the business is too cutthroat and too unpredictable. So, back to the original point, if chips are going to be everywhere, how do we make money on this? Enter semi-equipment manufacturers.
In many ways, the semi-equip sector is a lot like the semi sector. There's a fair amount of competition, much of it taking place in the shadow of AMAT. There are some important differences, however. To remain competitive, semi vendors have to update their capital equipment to the latest and greatest (especially significant in the transition to 300mm wafers). No matter who wins the chip wars, overall production is going nowhere but up. To accommodate higher production rates, you need more capital equipment (most fabs run 'round the clock already). A good sign, but it gets better. As manufacturers cram more components onto smaller chips, complexity/chip and chips/wafer goes up. The more chips on the wafer, the more valuable the wafer becomes. More importantly, "yield management" becomes crucial: having the probers at the end of the line is no longer sufficient. By adding in-process testing (i.e. probing), defective chips can be caught sooner, and can be marked so no further time is spent finishing the manufacture of a defective chip. This dramatically increases fab throughput. Moreover, if there is a problem in the line somewhere, in-process probing will spot it earlier and closer to the problem source. In effect, probers will become the monitor of the manufacturing process. Toward this end, EGLS is making acquisitions on the software side focused on yield management.
Needless to say, spreading probers over the manufacturing process means semi manufacturers will need more probers. EGLS is the sole domestic supplier (there are only 3 in the world) and has not only the industry leading prober, but also the most open solution (e.g. Ethernet), and soon an integrated yield management system.
So why isn't EGLS trading at 40? The fortunes of semi-equip manufacturers are closely tied the the semi manufacturers. In saying that, we've already tossed a good deal of rationality out the window. I don't think many people realize the long-term demand for chips of all kinds, and focus too closely on periodic declines in orders at PC makers as signs of silicon Armageddon. The fact of the matter is, we're going to be making more chips tomorrow.
Trading about 250K shares/day EGLS does not have the profile of a AMAT or KLAC, so it often gets forgotten when the segment rallies. Moreover, the whole segment is too esoteric for the typical investor who is far more comfortable with an IBM or Microsoft or Coca Cola, even if they are paying 40 times earnings for it. EGLS also has limited Asian exposure (their two competitors are Japanese), but no one seems to notice that, either.
As you probably know, they have a mountain of cash and no debt, so they can weather a downturn.
In a nutshell, that's the story. In the meantime, we wait.
Thom |
