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Technology Stocks : Varian Semiconductor Equipment Associates -- VSEA -- Ignore unavailable to you. Want to Upgrade?

To: Duker who wrote (171)	10/11/1999 9:28:00 AM
From: Duker	Respond to of 1929

The excerpt from the interview mentioning VSEA: Q: What else do you like? A: One name that we bought in August is a spinoff of Varian Associates, Varian Semiconductor, VSEA. They are in the ion-implantation system marketplace, competing against Applied Materials and Eaton. Varian Semi is selling at approximately three times revenues. To put that in perspective, consider that Applied Materials sells at 10 times revenues. This is a company that reported 34% gross margins in the June quarter. In 1996 and 1997, when semiconductor equipment companies were at their height, Varian was reporting 42%-43% gross margins. So we've got over 800-900 basis points of gross margin leverage. They have forecast that their marketplace should grow to $2 billion by 2002. The company's goal is to attain a 40% market share, up from the low 30s. The book-to-bill ratio [a measure of orders against booked revenues] for Varian has been 1.5, the industry average was around 1.25 in the last quarter. So this name has tremendous leverage. If they attain a market share of 40%, they could be at $800 million of revenues in 2002. If they come anywhere close to where Applied Materials sells, you could see a $7-$8 billion market cap. I don't think that will happen, but we certainly think that, over the next two to three years, we've got a situation that could trade at $100 and the stock is 22.5. Q: And what about earnings for this company? A: This company is losing money this year. The Street number for the next calendar year is 83 cents, 70 cents on a fiscal September basis. We think that number could be upward of $1 and then it could be significantly higher in calendar 2001, maybe $1.35-$1.40. Q: Why are they losing money this year? A: They're coming off a trough. The semiconductor equipment companies went through a vicious bear market in 1998 and the first part of this year. Varian Semi's first-quarter gross margins were only 7% but jumped to 34% in this most recent quarter. Their loss is very, very misleading. We bought a half position in the stock at about $16-$17. Once we got confirmation in this most recent quarter, we doubled the position up. We like averaging things up as opposed to averaging down. We feel that in the long run that reduces risk.