Shane:
I'm not sure I understand completely, but here's my best guess.
Three reasons: (1) Strong balance sheets, (2) some companies staying profitable, and (3) fund managers have loved the sector.
We only have two down cycles to compare this one to: 1990-92, and 1986-87. In both those cycles, all equipment companies were running on minimum cash and were in the red for several quarters. There is a big difference in the general condition of the companies this time around. The large upcycle from 1993-1996 did three things: (a) it made a lot of IPOs possible (universe of public equipment and component companies went from about 10 in 1992 to 60+ by 1996) and many companies had several secondaries to raise cash; (b) gave equipment companies a longer time to increase gross margins; and (c) made fund managers a lot of money and a great place to invest in the "infrastructure" of technology (it was a compelling story at the time).
However, the current valuations are all over the map. Except for a few (AMAT, NVLS, KLAC, CYMI, ASMLF, etc.) which have had "darling" status, most others are trading very near the valuations I mentioned. MTSN is trading very near cash value (have to be careful here for evaluating risk because you have to look at the cash burn rate).
To follow up on my points above:
(1) Cash value, or a multiple of it, could prop the stocks up a little. Certainly most have strong balance sheets.
(2) AMAT, NVLS, and KLAC have yet to post operating losses and they all have lots of cash. This could change very soon, however. Some analysts are starting to project AMAT operating losses the next quarter. AMAT's guidance is key in the next two months.
(3) AMAT is now part of the S&P500, so the sector has gained recognition. There will still be the "love of the sector" holding valuations slightly above historical lows. Since this segment will recover at some point, value players will be supporting them soon.
To conclude:
I think MB is right. This sector will not hit the low valuations until the general market does. Once people figure out how bad 1999 will really be, there will be one last dive. For the record, I expect both AMAT and NVLS in the 16-19 range soon. Not enough return to short, though.
Z |
