Zeev is a knowledgeable person and I have a great deal of respect for him on certain matters. We seem to be in disagreement over WFR. I would like to dissect his comments and show where we agree and then comment on where we disagree. Getting both sides of a debate in one message will help readers to make a better determination or to research further.
WFR is going to do better because the semis are in full bloom, but in the process, I believe management has committed too many missteps, the number of shares has almost doubled, the balance sheet has deteriorated (limiting WFR's ability to invest heavily in the next generation wafers two three years down the road)
For the most part I agree but the shares that were doubled is no different than if the stock went up and split. Our shares have not been diluted if we picked up the rights offerings shares and supplemented those shares when the stock dropped to the low 6s. Management did commit some missteps but they were caught off guard like most companies in the downturn. They did shoot themselves in the foot with an Uzi but I have seen the wafer feast and famine situation before. The balance sheet looks pathetic right now. however, from what we are reading, wafer capacity in the marketplace has close to doubled in certain areas. This should have a positive effect on WFR. Where we might disagree further is the bottom line benefits of a ramp, in wafer output by WFR. MEMC electronics has a high operating overhead associated with wafer production, whether the facility is empty or running at full capacity. Therefore, the profitability of WFR will improve geometrically or expotentially as they ramp, and not improve linearly. So it is possible for a dramatic improvement in the very near term. As far as investing for future demand, we can only think of the major 300mm programs. One of the management missteps was going full steam on the 300mm initiative early on and then shutting it down due to lack of commitment by the industry. My impression is that the 300mm is "in the bag" waiting for the dust to clear. I have personally seen 300mm wafers so the capability already exists. It is a matter of ramping up that capacity. The rest of the work is more in process control, repeatability, reliability and repeatability. These are not mega million dollar programs.
and the breakeven is now probably (without the future higher margins 300 mm wafers) well above $250 MM as long as Spartansburg is open, and somewhat lower once it is closed. They probably have two more quarters of losses ahead of them.
Well, if I said 1 quarter, it really means we are in agreement. However, the market seems to look at least 6 months out in their pricing of stocks. they price in how much of a premium or discount they will give these stocks in this time frame. Spartansburg has been around for a gazillion years, in IC industry life cycles, and shutting it down will more than likely do everything Zeev states, and maybe more. Moving to a newer, more advanced manufacturing site and consolidating the manufacturing process is very cost effective. The equipment is all bought and paid for by this time, but anything of value could be transferred to other locations. We both agree this is a good move.
Until pricing power comes back to that segment of the industry, meaning an increase in demand from last quarter of some 50%, IMHO, they will not be making money.
This is our major point of disagreement with one of us being correct. unfortunately it may take a few quarters to determine which of us might be correct. My sources have the fabs filling up and more capacity being brought on line. I see announcements like ramping of Wafertek to 7.5K wafers per month, with a quick ramp to 15K per month which was the original forecast. Now we are reading they want to go to 20K per month, as they look at capacity limiting processes. As we come out of this downturn, it is my firm belief that during all of this capacity idling time, numerous manufacturing cycle time and process cycle times were closely looked at for improvements. So, I believe that as we are ramping these fabs back up, we have optimized many things within the wafer fab to allow more wafers to be processed per given time period. reducing process cycle time and reducing manufacturing cycle time effectively increases the number of wafers that can be processed through a given fabrication area. So, I believe a 4000 wafer per week fab of 3 years ago may be a 4500 wafer per week fab now, and that is conservative. Plus, we have seen numerous 6" to 8" conversions that should also help the bottom line of the wafer producers like WFR.
To have visibility of let say $1/share earnings before taxes (god knows they have a lot of carry forward), or $70 MM, I think they need to operate at an annual rate in excess of $1.2 billion, or double the rate of the last quarter (which was an annual rate of about $600 MM), that will assume about a 10% gross margin (right now they are still at
negative gross margins, but hopefully with the closing of Sparta and increase production in Asia, margins will improve).
I agree with these comments and think it is very achievable since the negative margins have a great deal to do with the capacity levels of most of their facilities and the ill timed JVs in Asia. Hopefully the improved environment in Asia will help remedy this situation. I will state that my opinion is overly optimistic and definitely more optimistic than Zeev's. That's what makes this forum so great. We see everyone's perspective.
Frankly, I do not see them reaching these levels for some time.
And I do see them reaching these levels based on my available information.
I am figuring that the book value has now deteriorated to under $6/share, so they are no longer a great bargain. From a technical point of view WFR has broken out alright, but there are many other ways to participate in this segment which in my opinion are better. I would be a seller when the stock gets back to the $10 to $12 area if I owned any. As a matter of fact I would be a seller around here as well.
Due to the prices we acquired WFR at, many of my readers would be close to doubling their money at those levels and would be content. However, at those low prices and the potential for getting back to the $24 IPO price within the next 1-2 years, it certainly would be an attractive investment with a high percentage return. All one has to do is look at ASYT and LRCX, 2 stocks we were very Bullish on when they were in the single digits not that long ago. we feel the same way about WFR.
When the 300 mm program comes on board, one should reevaluate WFR's success or lack thereof in capitalizing on this high margin opportunity. TRUE but I think WFR will be a major player.
Now for something we both will agree on. WFR is extremely under-followed by the street and very little commentary is provided by the street. Furthermore is trades extremely low volumes relative to other stocks in this sector. This means that it will not take much to move this stock in either direction.
Andrew Vance
RadarView Newsletter
avance@radarview.com |
