Actually Zeev, this stock is getting to be a better value these days
relative to the other semi-equipment makers. Since I sold my PMAT at
11.75 most of my other holding in the semi-equipment area are up 50%
or more, and some such as VECO and PRIA have done much better, while
this stock is virtually unchanged. Earlier I predicted a fall to the
$5-8 range for this stock, post-merger, but at the time I was not
expecting the sector to shoot up so fast so soon. Relative to the
other members of the industry this stock is now 1/3 less valuable
than it was, even though it has not fallen in absolute terms.
I believe that the stock now reflects much of the bad news of the
merger. There are two questions that I have now. The first relates
to the industry in general. If a recovery is to begin in six months,
as some believe, then now is as good a time to get back in this stock
as there ever will be. On the other hand I am baffled by the thought
that we can have a semi-industry recovery without a recovery of the
DRAM sector, which is by far and away the largest sector of the semi
industry. DRAM prices are now in the $7 range and still falling. New
DRAM fabs in Tiawan are still not operational. Existing fabs are
running below capacity because the price is below the variable cost
of production. Some FABs under construction such as the Micron fab
in Utah have been mothballed. Thus before DRAM industry members need
new equipment they must digest both current capacity and additional
capacity that is under construction. Any growth in semi-equipment
orders in the next 18 months must therefore come outside the DRAM
industry. Is there enough growth in sectors such as ASICs, DSP's,
CPU's, 3D video, video compression, and communication to fuel a
resumption of orders in equipment in the next 6 months? My impression
is that many of the aforementioned products (ASICs, video chips, etc)
are traditionally produced in older, depreciated fabs, and therefore
won't fuel a demand for new equipment. CPU's and DSP's do require
leading edge equipment, and are growing nicely, but can they support
the equipment industry on their own? All thoughts are appreciated.
This is fairly important, because if the market ceases to anticipate
that the equip companies will see sales stabalize and start to grow
again by mid-1997 they will all lose a substantial portion of their
value, including PMAT.
The second question is with regard to the specific prospects of the
new combined companies. First allow me to re-examine the data that I
posted earlier. In their hurry to attack me personally, some on the
board didn't even bother to examine the data I posted and correct an
error which I made. I said that combined sales would be down 33%.
This is incorrect. PMAT sales declined 22.5% from $10.2 to $7.9
million, while Electrotech's sales declined 33% from $23.7 million
to $15.9 million. This is a combined reduction of 30%. Thus looking
at my table:
Q3 vs. Q2
NVLS Flat
PMAT -22.5%
AMAT -23%
LRCX -27%
Electrotech -33%
MTSN -40%
GGNS -45%
Keep in mind in examining these numbers that PMAT has not been in
business for very long, and does not have a large established
customer base, unlike many competitors. Thus AMAT, LRCX, NVLS, and
GGNS get a significant portion of their sales from parts and service,
a component which will rise in downturns as customers keep older
equipment operating longer than they otherwise might. I believe
that the component for parts and service is about 15-20%, but I am
not sure. Also, established companies have the inside track for
repeat sales.
Thus these numbers support my initial hypothesis that PMAT as a
leading edge company without trailing edge products was in better
postion than most in the industry to sustain sales through a downturn.
Electrotech appears to be fairly typical, or slightly worse than
average in terms of sustaining sales, however, so at the current time
they appear to be a drag. If their sales force can now increase the
PMAT side sales in Europe, though, then some of the advantages that
others have postulated could overcome some of the disadvantages of
the merger.
Thus, I am now neutral as to the company itself. I feel that much of
the bad news of the combination, and the resulting decline of sales,
is taken into account in the price of the stock. I know that you
believe that there will possibly be more problems, including
additional employee defections, or possible stock sales by Electrotech
owners which could have a short term negative effect on the price. On
the other hand, I am increasingly negative on the industry as a whole,
because I feel that the market may be overly optimistic about an early
recovery. The problem may just be that I don't understand, but
perhaps others here could enlighten me as to how the semi-equipment
industry is going to recover before mid-1998. Also, I would
appreciate an examination of the cash/financing resources of the
combined companies. Can they make money at these sales levels, or
are we looking at a situation where it won't be profitable until the
industry as a whole picks up? How long can they afford the interest
payments at these sales levels if sales don't pick up? Does anyone
here have a financial model for this company?
Carl |
