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Technology Stocks : MEMC INT'L. (WFR -NYSE) The Sleeping Giant? -- Ignore unavailable to you. Want to Upgrade?

To: Andrew Vance who wrote (4469)	8/12/1999 8:47:00 PM
From: Scotsman	Read Replies (1) \| Respond to of 4697

Hey Zeev, long time since I posted. My bananas that I was saving for adding to my MEMC have sailed, but I have more being picked. Do you think this is a good entry point?

To: Andrew Vance who wrote (4469)	8/12/1999 8:47:00 PM
From: Andrew Vance	Read Replies (2) \| Respond to of 4697

This is what readers have seen over the past few days. On page 12 of today's RadarView, you reprinted the news article "The ADR Report". I read something that does not make sense to me, and hope you can explain it. The sentence was: "With the recent Japanese announcements concerning wafer makers raising prices, the first time in many years, this up tick in raw material prices bodes well for the entire sector and Taiwan Semiconductor benefits from that." I find the logic convoluted. Response: Actually we were just as confused by the author's rationale and shared the comments with the readers, as is. This is what my take on the subject is. Increases in wafer prices usually get passed along to the end foundry customer (plus an added mark-up.) This is to be expected. The wafer capacity issue, regardless of the price increase, puts the industry on notice that there will be a finite amount of chips that can be made now. No matter how much IC manufacturing capacity comes on line, it is constrained by the availability of wafers. Therefore, the price AND availability are two real good reasons for TSM to raise prices on the devices they manufacture for their end customers. New contracts or upsides to existing contracts can be assessed higher charges, as the "market will bear." We do not give the author that much credit to have inferred that. The results of the capacity constraints should be that margins would increase for TSM and the first law of Economics: The Law of Supply and Demand would prevail. Not only that but they can blame the wafer producers for the duo-fold problem along with the growing need for more IC manufacturing capacity within the foundry sector. The interesting part about this, is that it is a WINDFALL type profit situation for the chip producers. 1. A 10% wafer increase will probably result in a 15% or more increase passed to the end customer. 2. The capacity issue will allow price rises as demand for capacity exceeds supply, allowing for higher prices to be charged. 3. The new advanced technology produces smaller die, which means more die per wafer, which means higher yields per wafer (defect density), and lower cost per die produced. This increases revenues, margin, and profits per wafer produced anyway. 4. Fabs that are now running at capacity, have the lowest wafer costs possible since the wafer costs are more heavily influenced by fixed overhead costs than variable costs. 5. Continuous process improvement is a mainstay of the industry, and these activities helps to reduce costs and increase yields, thereby increasing revenues and profits per wafer or at least keep parity with falling ASPs for the devices produced. So the questions to be asked are whether: 1. The IC producers will absorb the increase in wafer costs and not pass it along to their customers. 2. The Wafer producers will use this capacity issue to recoup much of the losses sustained the past few years and to eventually bring prices back up to pre downturn levels. 3. The IC producers realize that long term contracts with wafer suppliers might be required to ensure a steady stream of wafers for their existing and future requirements. On many occasions we talked about the flip side of the Feast-Famine scenario. The IC and IC equipment industry might be exiting its worst downturn, where a good deal of capacity was under utilized, and moving into a recovery where capacity is fully utilized. However, as this recovery progresses and the time for "feasting" approaches, they find out that new technologies require new equipment and everyone is scrambling at the same time for limited resources. These resources are people, plant, equipment, and raw materials. We will not belabor the point any further other than to say the tables have turned and this industry does have a habit of "compensating for past misdeeds." When times were bad, price concessions were forced on the non-IC manufacturing businesses (raw materials, equipment, foundries, etal.). Now that the tables are turned, the time has come to recapture those concessions. Very rarely have we seen a situation where the two parties met half way and gave consideration to the other party's dilemma. So, what we see is higher wages offered to Engineers and production workers that were laid off during the downturn (more than 40K affected). We also see an allocation of equipment and raw materials until a new equilibrium is reached after this next round of expansion. Finally, we see a return to decent profitability by those sectors that were "abused" during the last downturn. For this reason, we believe the basic substrate from which all devices are built upon, the wafer, should enjoy one of the most dramatic turnarounds in the entire semiconductor sector. REMINDER: WFR went public at $24 and opened a $27 during SEMICON West, a few years ago. It reached more than $50 during the height of the business cycle. We see no reason for this stock not to reach comparable levels. The only negative we see is the very small float that causes it to be thinly traded. VEBA has increased its stake in the company and there may not be enough shares on the market to attract many institutional players.