Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Semi Equipment Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Return to Sender who wrote (1647)	1/14/2002 11:03:24 PM
From: Crossy	Respond to of 95597

RtS, well valuation is the "key arsenal" that any investor has to frame for his purposes. There are many competing measures, all have strengths and weaknesses and there is no "one ultimately correct" method in the end. Normally PE ratios or PEG (Price/Earnings to Growth) are proposed. Personally I view the "pure" PE ratio as pretty useless. Why ? When I started investing I invested acc. to analyst expected PE ratios. Then I found out how "lagging" this indicator was. I got in too late and got out too early. All attractive stocks rose before the PE ratio showed it. All stocks where those familiar with the fundamentals of the biz experienced worsening conditions had "attractive" PE ratios only to see them declared "stale" at the next analyst downgrade. When you look at any particularly income statement you will notice that EPS is the bottom line. And as such it is a "residual" figure. I found that Prise / Sales levels are way more "original" in their contents of information. Usually for techstocks (in growth industries where you see firms expanding a niche or portfolios of market unlike in mature industries where there is no sales growth just getting more "efficient") top line has to grow before bottom line will. Also earnings can be negative in downturns of cyclical or semi-cyclical industries (like semi equipment or photonics). Sales per share (and PSR ratios hence) are more "stable" in their composition and more leading than earnings (and PE) figures. The only problem is you can't compare inter-sector firms like you can do with PE because the Price/Sales ratio is only comparable within the same industry. Generally the higher the gross margin the higher the PSR you can arrive at. Not even can you compare a RETAILER (tight Gross Margin, low PSR) with a MANUFACTURER of the same goods !. But you could assume that "optimal management" and financial ressources provided two firms with a similar "gross margin potential" (!) should be valued ULTIMATELY at the same Price/Sales ratio. As the definition implies you need Sales to calculate a PSR ratio. For "concept" stocks this doesn'T apply. So a PSR is meaningsless here (upcoming medical equipment firms, biotechs, everywhere where you got a large agency approval/regulatory process like development stage pharmas etc.). Here you have to resort to different methods of valuation. Generally you could use "real options". Act if the stock was an option. Attach a market size and a market penetration rate to the product in development. Attach a probability to get an probabilistic "estimate of sales" divide it by number of shares out. That's an expcted sales/share figure. You can calculate a PSR of this. Important is to include the risk of bankruptcy here. You have to figure in this info. Usually good to look at current ratio also. Some old pros like Ken Fisher have written up on Price/Sales ratio and techstocks. My feeling is you get a typical "average sector" PSR by getting the average PSR number of a given industry. For semis, any PSR under 1 is a real bargain. In today's environment of fast (mostly realtime) access to company news and filings it's no surprise that a lot of this info is usually interpolated and pre-empted into tODAY's market prices. Moreover markets tend to "extrapolate" current fundamental environments well into the future be them good or bad. Not only this also leaders always attract most "visibility" and as such usually command the highest PSR of any firms in their respective industries. If you look at PSR valuations of semis in boom and bust periods you will see that in boom cycles PSR in select niches could arrive at 50+ (RFMD, AMCC etc. in 2000). Under 2 is usually quite good. Compound semi firms have a higher PSR as silicon only outfits. Because the market trends to preempt and extrapolate I want to point out that it warrants for possible sources of info that the market cannot have preempted yet - because it is disruptive to the firms recent internal structure or external business environment. If you "feel" or have indicators at hand (newsfeed or just a well-founded inference) that a silicon shop might acquire compound semi knowhow (as FCS did) you could make up your mind and invest on this. Once this info trickles down the peoples' minds and the change indeed materializes then a new yardstick of valuation has to be established - often this is accompanied with a big move by the underlying stock (MSCC after they bought Infinesse, FCS after they bought QT Opto) Related is the concept to look at gross margin trends. If GM trends up but the firm has comitted to R&D and MArketing and no EPS improvement shows it's a GOOD sign to buy more of the stock. There will be a time when the fruits from research labour will be harvested when further R&D pumping up won't be anymore necessary- by that time the EPS could make big jumps. The essence - look for conditions and all forces that might "change" the assumptions for others' valuation of a particluar firm. A final observation of mine: I never buy market leaders. I don't buy INTC, I never bought AMAT and I won't buy NVDA - why ? Call me stingy but I don't want to pay the premium for a sector leader. Who guarantees that the leader will still be the leader in a year ? I like to find firms doing a "strong catch up" so from your list, I indeed do like very much CYMI and GNSS. CYMI has to chance to significantly broaden its scope (but this is a midterm opportunity - beyond DUV). GNSS is very compelling according to valuations. I was looking at BTUI (at $3) because of similar motivations but the stock ran away. And yes, I see there was ASYS hinted on this thread. Great stock. Quite few shares out. Quite astonishing they stayed profitable even during the current slump. It was a 3 bagger for me in the summer of 2000 and I still sold too early <g> best wishes CROSSY

To: Return to Sender who wrote (1647)	1/14/2002 11:14:16 PM
From: Crossy	Read Replies (2) \| Respond to of 95597

RtS - an addendum, I recently concluded that from a valuation point of view cash and fixed interest investment assets (but not debt) of a firm should be SUBTRACTED from the "price" components of the PSR ratios (and also PE ratios if you calculate them). This makes the ratio comparison way more meaningful. I assume that a $5 bill has 5 dollars of value. Usually it doesn't matter if the asset is "inside" or outside the firm. If you apply DCF (discounted cash flow) analysis you follow that the value of a firm is the sum of all expected cash flows for some time in the future discounted annually by a factor (usually inflation or long bond yield or similar) to make the inflows & outflows comparable. I don't include any debt component here because its repayment is assumed in the underlying DCF calculations.. But what to do with "extra cash" ? IT won't appear anywhere here. But clearly if a firm got $100m in the bank in addition to its exp. cash flows it should be worth more as in case this "free cash" wasn't present. You could adjust for this by asessing this free cash and investment component and subtracting it from the price component in a PSR. Look at CLTK: cash around $8 per share in the bank. Instead of a PSR of around 2 you will end up with an adjusted PSR of 0.75. Very low and for a compound semi it's "close out" valuation. rgrds CROSSY