Borrowed form the KLIC thread:
Excerpt from Barron's
we rang up Scott Black of Delphi Management-Barron's Roundtable member and card-carrying contrarian -- to sound him out on what he thought was really cheap on the smallcap front, we got an earful about those very same semi-equipment makers.
Scott likes low-multiple stocks with lush cash flows and solid balance sheets. His accounts, on average, are up over 20% this year. He has never been shy about buying when the rest of world is dumping.
He's doing just that with two small-cap producers of chip equipment that he finds "incredibly cheap." Off 60%-70% from their highs, they have been, as he puts it, "absolutely blown away."
What prompts him to plunk down good money for these humbled stocks in a suspect industry is his firm belief, grounded in his own research and extensive conversation with major companies in the field, that the equipment cycle is destined to last a good deal longer than people expect.
And just why does he think so?
For one thing, next year a slug of new capacity is slated to come on stream: world-wide, 11 new fabrication facilities. For another, by late 2001, he foresees the start of the giant migration from 200-mm to 300-mm wafers, a move that will "really ramp up in 2002."
Equipment sales will probably climb 35% in 2000, from '99, Scott reckons -- clearly a banner year. But, more important, he has them growing a robust 25% next year. "Applied Materials is the Big Kahuna of the whole industry. Their order rates," he reports, "are going through the roof and they really drive this whole business."
So which pair of chip-equipment stocks is he particularly hot on?
Kulicke & Soffa Industries, for one. It ranks as the world's largest maker of assembly equipment, with over half of revenues coming from wire bonders.
The No. 1 supplier of this critical equipment in all geographic regions except Japan, the company boasts about 70% of the U.S. market and roughly 33% worldwide.
Demand for this gear, however vital, is nonetheless notoriously cyclical. Well aware of that melancholy fact, investors -- at the faintest sign of a slowdown -- are quick to unload. And early last month, when the company disclosed that an unnamed customer had requested a delay on the delivery of some 200 wirebonders, the stock got hammered, trading under 14.
It has since recovered to 15 and change, but that's still a heap of points below the March peak of 43. In the space of seven months, Kulicke's stock-market value has been sliced from $2.5 billion to about $900 million.
The selling in this premier tech company, Black insists, has simply been overdone.
He stresses that operations remain vibrant, even though the fourth quarter, ending this month, will not match the splendid June quarter.
"Business is still very strong," Scott relates, "and it's broad-based; no one customer is even 10%."
Still, the first half of fiscal '01, ending in March, will at best be roughly flat with this year's second half. And we couldn't help wondering aloud if postponed deliveries might not prove to be cancelled ones.
"The unnamed customer was ASE Inc.," Black says, "one of the fabs over in Taiwan." He contends the equipment will eventually be delivered and that ASE's delay is not the onset of a wave of postponements.
So while for this fiscal year he's looking for $1.95 a share, in the second half of next fiscal year he predicts that brisk growth will resume. His estimate for September 2001 is $2.65 a share, a dime higher than First Call's consensus of $2.55.
"That's 5.8 times earnings," he points out. "This stock is discounting the end of the world."
Obviously, everything depends on those anticipated earnings materializing. If they fail to, the stock will head lower. Book value is less than $7 a share.
"You don't have to worry if the business sputters for a quarter or two," he assures us. "This company has an absolutely bulletproof balance sheet." And a quick glance reveals that cash and investments handily outweigh debt.
Just as equipment stocks plunge on any whiff of weakness, they take wing at the first sign of strength. In 12 months, Black suggests, shares of Kulicke & Soffa could be selling at $40.
interactive.wsj.com |
