Skeeter:
Fundamental analysis methodology on semi-equips....
I have noticed that prices fluctuate between 0.8-5x sales for semi equip stcoks generally over the years. Ratios to book values have a similar and close fluctuation, but sales is more telling. That is the measure I will use here.
(1) I looked at 29 companies, closing price 12/24. I did not count the materials nor components guys, and excluded Varian since it was not a pure play.
(2) Since the market values companies in three segments, so did I. I took the 29 companies and split them into three groups. Blue chips gaining share and good product position (9 "A" companies), companies with solid management but only stable product position (subject to overall market fluctuations - 13 "B" companies), and companies which had deteriorating product positions and/or dog management (7 "C" companies).
(3) Assumed the following thesis: stocks would rise on order rates and peak in the Jan/Feb time frame, orders would then stall causing a correction in the stocks, settling to a low late in Q3. Order rates would not go to the low seen in Q3-98. Why? In wnd half 1998, the capital spending to semi revenue ratio dipped below 17%, an unsustainably low level given technology migration needs. Average for the ratio is 21-22% based on return on asset analysis of building a fab. Recent peak was over 30% in 1996. Assumed a recovery to about 19% by year end 1999, as there will still be overcapacity.
(4) IMPORTANT - Assumed peak and trough Price to sales ratios for all three segments based on investor confidence in company. "A" stocks range from 4.0-4.5x at peak (lower than historical peaks in 1995 and 1997) and 1.5-3.0x at trough (AMAT was 3x, SFAM was 1.5x). "B" companies 2-3x at peak, and 0.8-1.3x and trough. "C" companies worse.
(5) MORE IMPORTANT - Sales comparisons in the next several quarters will be bad, so the sales number used to calculate P/S ratio targets for the lows in Q3-99 needs to be 25% lower than current 12-month trailing figures (based on quarterly forecast analysis assuming the overall equipment market is flat to down slightly in 1999 relative to 1998).
Results ....
"A" Companies - avg P/sales 3.1x, avg P/book 4.0x, possible upside +43% avg, possible downside -44% by Q3-99
"B" Companies - avg P/S 1.6x (surprisingly low to me), avg P/B 1.5x, possible upside +65% avg (doubtful), possible downside -48% by Q3-99
"C" Companies - avg P/S 0.55x (wow), avg P/B 2.4x, possible downside -43% by Q3-99
Observations...
** Of the 29 companies, only 9 recorded trailing 12 mo. profitability, and with the next quarter release that number will go to 6.
** NVLS has the highest net profit margin, followed by TER
** The best shorts are in the "A" group since they have the higher valuations (list of top 5 in next post)
Conclusions...
** Equipment companies fairly valued but trading opportunities will exist both ways in the next year - AS ALWAYS in this sector.
** Downside targets mentioned in this thread are not realistic targets based on fundamental analysis.
Z
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