IRF and VLSI Part I of II.
Those who know me will attest that I make most of my trading decisions based on technical analysis. But before I plunk down a serious amount of money in one company, or "worse" average down, I crunch out a lot of fundamental analysis. The reason is because sometimes I am unwilling to take a loss in a stock simply because the chart says to get out. For the most part, technical analysis is useful for short term trading and if I like a company's fundamentals, I don't mind riding out the storm until the market returns to its senses. Before I do this, I have to be convinced that the fundamentals aren't going in the trash can the way the market is treating the stock. For example, I didn't average down in APM a few weeks ago and instead took the loss. I don't like the fundamentals at that company and was unwilling to hold my position when it broke down. I am a very big proponent of technical analysis and don't average down very often.
There are two kinds of risk in the stock market: company risk and market risk. I believe that IRF and VLSI are both going down in sympathy with other semiconductor stocks and not because of inherent problems at the company's themselves. Further, I think that these two stocks have been beaten down substantially below their fair value and eventually the market will bring them back to reality. Neither of these companies are highly dependent on the personal computer market and that is where most of the negative comments are being directed. This is one time that I don't mind averaging down: when a stock is being dragged down in sympathy with other stocks in its sector that are overvalued and probably deserve to go down.
With this in mind, I worked up a fundamental analysis on IRF and VLSI. The technical analysis is at the end of each report. Due to the length of this post, I will send VLSI in a separate post.
All data is in dollars except per share data and is as of March 31, 1998
IRF
Business description: International Rectifier designs, manufactures and markets semiconductors that are used for power conversion. IR pioneered and leads the world market in MOSFET transistors, a multi billion dollar semiconductor category that has grown about 1 1/2 times faster than integrated circuits for almost ten years. Over a dozen competitors are licensed under IR power MOSFET patents.
Target markets: IR produces semiconductors that are used in power steering systems, ani-lock braking systems, computers, disk drives, power supplies, cellular telephones, pagers, televisions, stereo equipment, power tools, home appliances, welders, motors, electronic fluorescent lights, lighting, washing machines, video cameras, vacuum cleaners, treadmills, radio controlled toys, satellites, submarines, space vehicles, global positioning systems, robotics, HVAC, flat panel displays, just to name a few.
Liquidity
Cash, cash equivalents, A/R: $205,100,000 ($4.00/share)
Inventory: $126,836,000 ($2.47/share)
Total current assets: $331,936,000 ($6.47/share)
Valuation
Sales last 12 months: 548,286,000 ($10.68/share)
Stock price/Sales = 0.98
Book value: 398,698,000 ($7.77/share)
Stock price/BV = 1.35
Shares outstanding: 51,319,000
A few comments. At Friday's close of $10 9/16, IRF is trading at only 1.35 x book value and 0.98 x sales. This is a give away, especially when one considers that they have $4.00 per share in cash and cash equivalents and total current assets of $6.47 per share. Earnings estimates as reported by I/B/E/S are down to a very conservative 7 cents for the June quarter and 8 cents for the September quarter. Based on past history, the company should be able to beat these estimates and I believe that analysts will raise the September estimate. The estimate for next fiscal year has been reduced to 57 cents, again very conservative in my judgement. The company earned 82 cents in 1995 on less revenue than they will have this year and $1.30 in 1996 on about the same revenue as they will have this year. The culprit was reduced margins due to competition from Japanese firms that forced IR to reduce prices. Still, the company should be able to earn 80 cents next fiscal year and that would put the stock at about 16, or 50% higher than Friday's close.
Technical analysis: IRF put in a key reversal on Friday, making a new 52 week low at 10 1/8 and closing higher on the day. The stock has resistance at 12 1/2 and I may lighten up on my position if it gets there. I'm planning to hold some stock for the longer term and trade some of it. The stock made a low at 11 1/4 in September 1996 and then rallied to a high of 17 1/8 in January 1997. It then declined to a low of 10 7/8 in April 1997 and followed with a rally to 23 3/4 in September 1997. It then began a decline that took it to Friday's low at 10 1/8. IRF has not been this low since October 1994 and it has historically held in the 10 to 11 area. The daily stochastic gave a buy signal on Friday and the DMI is coming off what looks like a bottom. The lower weekly bollinger band is near 10, also offering support. I think it is likely that IRF will trade between 20 and 23 in the next twelve to eighteen months. |
