From WSJ:
July 19, 2000
Heard in Florida:
Will Components Makers End Ride
On Roller Coaster on an Upswing?
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By David Milstead
The history of Kemet and AVX stock over the past year can be summed up quite simply. Their prices went way up. They went way down. Now they're heading back up, again. The big question is: How high will they go this time?
Stocks of the two South Carolina component makers had a torrid run-up, each gaining 300% between June 1999 and early May 2000. Kemet hit a 52-week high of $44.219 on May 1, while AVX hit a high of $50 on April 26, May 1 and 2. (All figures are adjusted for both firms' 2-for-1 split on June 1.)
But the two companies saw their stocks enter a free fall later in May, due to Wall Street's perception that the market for capacitors was starting to soften. Kemet lost nearly 50% of its value in six weeks; by July 6, shares were at $23.25. AVX's, meanwhile, plunged nearly 60% in the same period and was trading at $21.063 by July 6.
The fears of an oversupply were first voiced on May 23 at an electronic supply-chain conference hosted by Salomon Smith Barney. An electronics manufacturer, seeking to reassure its investors, said component shortages weren't as severe as in the previous quarter. But Wall Street took that to mean that demand for capacitors was starting to decline.
"There might have been a misunderstanding [of], `Well, if they have plenty of supply, they'll cut back on orders from suppliers,'" says Patrick Riley, a partner at Sawgrass Asset Management in Jacksonville.
Adds George Shipp, portfolio strategist at Scott & Stringfellow, Richmond, Va.: The perception was that "the incredible [capacitor] shortage is past, and that drove the momentum money out of the industry."
Then on July 5 the fears were intensified when Jonathan Joseph, a Salomon Smith Barney semiconductor analyst, said in a research report that he saw the first signs of slowdown in the industry, including price declines and contracting lead times for components.
But those concerns seem to have been allayed by both analysts and the capacitor makers. They now say that the capacitor market is as hot as ever. So, as the two stocks begin another rise -- AVX is trading at $27.188, while Kemet has rebounded to $28.313 -- the only question seems to be how far they can go before they get too pricey.
Capacitor stocks "probably overshot on the upside," says Mr. Shipp, "and we believe they've overshot on the downside." He added Myrtle Beach-based AVX to his firm's most-aggressive-growth portfolio on June 23, the day shares closed at $23.50.
AVX, Simpsonville-based Kemet and Vishay Intertechnology of Malvern, Pa., are the nation's only publicly traded makers of capacitors, which are used for virtually all electronic products. Major customers include International Business Machines, Compaq Computer, Nokia, Lucent Technologies, General Motors and Siemens, as well as component distributors. (Oversupply fears also took their toll on Vishay, which is trading at two-thirds of its 52-week high of $62.67 hit on May 18.)
For the past 12 to 18 months, surging production of consumer electronics, particularly cellular phones, has made demand for capacitors far outstrip supply. Kemet's sales for the fiscal year ended March 31 were up 45% to $822.1 million from fiscal 1999. AVX's sales for the same period were up 30% to $1.63 billion.
As of March 31, Kemet had unfilled orders totaling $354.2 million, seven times the amount a year earlier. AVX said its backlog stood at $636 million for the same period, up from $228 million at the end of fiscal 1999. (As of June 30, AVX's unfilled orders had risen 18% to $750.8 million.)
"The product is flying out the door," says Sawgrass's Mr. Riley. "They can't manufacture enough to meet demand." His firm bought into Kemet in August of 1999 at $11.56 a share and sold some of its holdings when the stock reached the high $30s this May because Kemet's run caused it to violate Sawgrass's constraint that no one equity exceed 4% of the portfolio's value. Portfolio constraints aside, Mr. Riley says he would buy the stock into the high $30s.
Yet the robust numbers weren't enough to quell concerns of industry weakness, which resulted in the spring sell-off.
There was a brief rebound on June 13, when the Kemet said first-quarter earnings would likely top Wall Street expectations by at least 50%. Kemet's shares rose 23% to $38 that day. Nonetheless, the industry returned to its slide, bottoming out July 5 over the report by Salomon's Mr. Joseph.
That's when Mark Hassenberg, an analyst with Donaldson, Lufkin & Jenrette stepped in. He arranged a conference call on July 10 with analysts and Roy Vallee, chief executive officer of Avnet, a Phoenix-based components distributor, to dispute Mr. Joseph's claims and reassure investors about the strength of the component market.
Within two days, AVX shares rebounded by 21% and Kemet's by 16%.
Mr. Joseph "just shot his mouth off," says Mr. Hassenberg.
Adds Mr.Vallee: "Our experience is we have not seen any improvement in the delivery of capacitors in this cycle. There is no softness in the market. Any increase in supply our vendors have been able to put on line have already been offset by increases in demand."
Meanwhile, Dick Rosen, AVX's chairman and chief executive, sought to do some damage control of his own on a Thursday conference call with analysts over what he called "the rumors that seem to be rampant about all kinds of negative things."
He said during the call: "Frankly, we don't see any of them," adding that high demand led one customer to ask to fly in from Australia to get 8,000 capacitors to restart an idle production line. "That doesn't sound like a surplus of production."
Glenn Spears, a Kemet executive vice president, also expresses frustration at Mr. Joseph's report: "He's just misinformed. He doesn't understand the difference between semiconductors and capacitors."
For his part, Mr. Joseph says he's not trying to suggest that capacitor makers are in trouble. "We don't follow them and that would be unfair," he says. "We're not singling out capacitors, we're throwing a rope around the whole commodity electronic-components industry. The supply-demand situation became extreme and we think it's become more in reality. But I don't want to make reality sound negative."
Investors were further comforted last Thursday, when AVX reported that sales for the first quarter ended June 30 jumped 75% to $602.4 million from a year earlier. Earnings totaled 68 cents a share, nearly seven times the year-earlier figure and above First Call/Thomson Financial's consensus estimate of 46 cents.
Some analysts attribute the electronics manufacturer's comments on the easing components shortages, and why the industry appears less concerned about supply, to a new focus on long-term supply agreements. After this year's component shortfall, they say, electronics makers are making deals that guarantee them a steady supply. And component makers are happy to lock in a steady stream of orders.
"It remains to be seen how these supply agreements will play out," says Jim Ricchiuti, an analyst covering Kemet at New York-based Needham & Co. "If the demand for [cellular-phone] handsets falls, will those agreements hold out?" He estimates Kemet will post earnings of $3.06 a share in fiscal 2001. He rates the stock a "strong buy" and has a 52-week price target of $50.
Regardless, analysts remain bullish on the two firms. Three of the four analysts covering Kemet rate it a "strong buy." The four analysts covering AVX are split between "strong buy" and "buy" ratings. Thomas Hopkins of Bear Stearns raised his fiscal 2001 estimates for AVX to $3.17 a share from $2.06 on July 13. Shelby Fleck of Morgan Stanley bumped her per-share estimates on July 14 to $3.05 from $1.78.
AVX and Kemet are trading at about nine to 12 times analysts' estimates of 2001 earnings, about half their peak price/earnings ratio earlier this year. The Standard & Poor's 500-stock index is trading at 25 times earnings. "Why can't they trade at the market multiple?" asks Scott & Stringfellow's Mr. Shipp. "It's hard to say the outlook is good for Intel, Nokia and Cisco and it's not good for AVX or Kemet." |
