Favourable mention in this Week's Barron's...
Brooks Banks On Robot Power
Bob Perkins, an inveterate buyer of trashed technology stocks and the 58-year-old manager of Berger Small Cap Value fund, is very keen on robots.
The ones he likes, it turns out, don't look much like C-3PO of Star Wars or Robby in Forbidden Planet. But in their own, less anthropomorphic way, these clever machines -- vacuum substrate handling robots, as they're called -- perform enormously useful tasks for large makers of semiconductor equipment like LAM Research, KLA-Tencor, Novellus and Tokyo Electron.
And the small firm that makes these gadgets -- Brooks Automation of Chelmsford, Massachusetts -- just happens to be the world's leading supplier of vacuum robots and cluster tool-handling systems to the chip-equipment industry. In fact, Brooks' only real competition comes from equipment makers themselves, like Applied Materials, that build most of their own automation gear in-house.
Public less than four years, Brooks has grown remarkably fast -- at least until recently. From fiscal '92 through '96, ended September, sales soared from $13 million to $90 million, while earnings rocketed from $300,000, or seven cents a share, to $8.5 million, or $1.04. Return on assets averaged 13%. Last year, the stock topped 41.
Friday, alas, it closed at 9 1/2 .
What ails Brooks is what ails most chip-equipment makers: Orders have pretty much dried up, either stretched out or canceled.
Who needs new equipment when the world is awash in overcapacity and prices are in a tailspin? The glut in DRAMs -- which account for a big chunk of equipment sales -- has been exacerbated by big leaps in productivity. Manufacturers shrink chip size, make more chips per wafer and so boost capacity without spending a dime on new equipment.
And then, of course, there's Asia. Investment in chip equipment this year is likely to plunge 40% in Japan and more like 65%-70% in Korea. And although buying in the U.S. -- at least so far -- has held up relatively well, global demand for chip equipment is expected to fall 30%-plus this year. And that's on top of last year's 5% or so decline.
Brooks will lose 33 cents a share for fiscal 1998, ending this month, according to First Call's consensus estimate, versus last year's net of a dime. For September 1999, the company is expected to be at least slightly in the black.
So what's to like?
Well, at the first signs of a turn -- and we're the first to concede that right now the valley is looking pretty wide -- the impact on Brooks is likely to be swift and powerful.
For one thing, automation is a hot topic in semiconductor circles. Because each new generation of chip requires more stringent processing, tools like the ones Brooks makes become ever more critical.
What's more, since the expense of developing these machines is on the rise, equipment makers are increasingly trying to cut costs by outsourcing. To wit: Brooks' components have been designed into 66% of sub-0.5-micron cluster tools, up from 14% a generation ago, and into 78% of 300mm tools. Those figures are courtesy of the folks at Credit Suisse/First Boston, who rated Brooks a "Buy" late last month at 9 3/8 . They noted that once incorporated into a design, components generate revenue for five to seven years. And citing Brooks's expanding customer base, growing market share and tight rein on expenses, they reckoned the company could earn $1.20 a share in fiscal 2000.
Bob Perkins, too, thinks Brooks can earn north of $1 a share once the cycle turns. If he's right, the stock, now 9 1/2, could easily double.
And the downside, he argues, isn't too scary. Brooks is selling at one times sales, 70% of book value, and boasts a virtually debt-free balance sheet-with $6.50 a share in cash.
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