Hi Andrew, as long as you "disect" my post and not me, it is fine with me. Here is a slight rebuttal:
After the right offering, VEBA has 71% before that they had less than 50%. I think that this is important, not only because it does create a dilution of the public holders, but more importantly, because VEBA will now have to report WFR's results on their own income statement and balance sheet. I have no opinion at this time if that is good or bad, but with the recent move of divestiture, WFR may have to be expunged despite the recent denials. What was once a "friendly" lender may no longer be.
As for the revival in the semis and increased demand for wafers, I would say that because of the move of the major segment (the DRAM) to sub .25 microns and some manufacturers are already standardizing to .18 Microns, the increase in end demand for chips, will not translate in an equal increase in end demand for wafers, furthermore, because pricing in the DRAM segment is still relatively poor, pressure on wafer cost will still be on. I would guess that a 30% increase sales of chip we will get only half as much increase in wafers shipped. But even if we assume that the price pressure on chips is such that despite the feature reductions, more actual Si real estate ( are shipped to achieve sales increase of 30%, I cannot see the increase in wafers shipped exceeding the increase rate of the overall semi sales. I think that a best case scenario would be the same increase in Si real estate.
My point is that over the whole of the next 12 months, such an increase is not sufficient to absorb the over capacity in the wafer production capacity. Last time I heard (during the first quarter), the wafer producers were working at 62% of capacity, we will need a 50% increase in production to get us to 93% of capacity were we will start and feel some tightness and thus possible more pricing flexibility.
I think that what is confusing us is the recent reports from the Taiwanese contract foundries of sudden pick up in their business and few expansions here and there, but these will not increase total wafer demand by more than some 20% (WAG), what we really need to see is announcement of new (hopefully 300 mm) foundries. There have been virtually none announced in the last few months. Another point of optimism was the recent BTB of 1.3 from the semi equipment makers, and that indeed is good, but not yet sufficient for WFR profitability. I think that the most optimistic view will probably permeate the market next week, when AMAT reports and their CC they will, hopefully have very good things to say about their own BTB. If was an owner of WFR, I would use this enthusiasm injection to lighten up.
As for the 1 quarter vs two or more quarters (I really think that they will not earn anything substantial until they are shipping quantities of 300 mm wafers), my reasoning for pessimism is that according to their own documents, Spartansburg will not close for two quarters. But to add injury to insult, if they are to keep Spartansburg customers, each new wafer facility will have to be qualified anew by the customers, a process which they themselves implied is lengthy and might cause loss of some customers to competitors (who also have excess capacity).
The greatest concern I have is that at $150 MM quarterly, they had negative gross margins of $10 MM, and that is after major force reductions have already occurred and major non recurring losses absorbed, that probably means that on a gross margin basis they need something like $175 to $180 quarterly sales just cover manufacturing overhead. If you assume that they get very good 33% gross margin beyonds their breakeven, they will need another $120 MM to cover corporate overhead (of about $40 MM), thus their quarterly break even is annual sales of $1.2 billions (to be corrected once we get more typical Spartansburg-less figures). That means they need to double their production to be profitable, and as I said before, I doubt that they will do more than 30% higher volume (or about $200 MM quarterly).
One thing that we are forgetting in evaluating WFR is that their pricing has deteriorated markedly, and while two years ago they were profitable at about $1 billion annual sales, despite their cutting some $60 MM in annual costs, their profit margins are razor thin.
To earn a buck before taxes, they will need at least another $200 MM above the the breakeven or at least $1.4 Billion. I figure that a company like WFR should be valued at 20 times after tax earnings, and thus a price of $10/share would be justified IMHO, only when good visibility of their ability to ship $1.4 B per year is there. This is a tall order, and will not happen until they can start and increase their prices. (mind you I have assumed gross margin post plants cost covering of 33% which is quite rich, and I do not think that they ever got that high).
If WFR reaches the sales level that justify $10 per share, IMO it will be at the peak of the next semi cycle with not much more potential down the road. I would admit that I may very rapidly change my opinion if I saw in a period of three months announcement for some 10 300 mm wafer fab planned (providing these do not coincide in flattening of the BTB ratio in the industry (VBG).
Zeev |
