Jacob, you're questions are very insightful and though I'm far from the most informed CYMI investor on this board, I'll give you my two cents...
<<1. The most negative thing about the company is that it is new, without much of a track record. Morgan of AMAT has been through about a dozen cycles, and has proven he knows how to survive. I haven't been able to find much on CYMI management.>>
Yup, them's the facts. Hard to compare these two company's. If you look at CYMI they have only relatively recently become a real, on-going business. Management clearly has some real "vision", whether they will be good business managers in a storm is pretty hard to predict. Smart people, though, from what I can see.
<<2. P/S=2 now, the same as during the 96 low. Good value, and possibly indicating it won't go much further down. TA is also encouraging, as the stock has support at 15 going back to 3/97.>>
The "value" is obviously relative to the overall conditions. There is clear support at 15 and baring worse news from Asia this may be about as bad as it gets. Downside is what you talked about regarding a potential Japanese meltdown. True depression conditions in Japan would spill over into both the U.S. and European economies and create havoc in stock markets. The U.S. economy seems to be in a clear "bubble" phase with asset inflation and real estate inflation leading the bubble growth. This is VERY similar to the situation in Japan at the height of its bubble. If the bubble bursts rather than just slowly lets down, there isn't going to be much of anyplace to hide.
<<3. Why doesn't ASMLF stock track exactly with CYMI? Doesn't improving or declining business conditions for one imply the same for the other?>>
My feeling is that CYMI is the most leveraged of all the semi-equip co's. If the move to smaller die size really picks up speed, with a turnaround in semi demand CYMI has more to gain than anyone. The whole industry will pick up, but, no one can expect the growth rate that CYMI could expect. However, if the demand for semi's continues to lag and the supply remains too large, CYMI has the most to lose as the move to smaller sizes gets delayed. With little service revenue and relacement revenue to count on, its very vulnerable on the downside in that scenario.
<<4. CYMI owns its niche, and has high margins. How high are barriers to entry? That is, when will Komatsu become a serious competitor? The Nikon-Cymer-Komatsu relationship looks a lot like Compaq-intel-AMD. Compaq doesn't like having only one vendor for a key part, so they keep on fostering AMD, so far with limited success. Every time the market begins to take AMD seriously, has turned out to be a good time to invest in INTC, because AMD consistently fails to execute. Just how hard is it to make lasers?>>
This is a great question and the great imponderable. I think that the track record suggests that its not a small task or investment to become a real player in this space. The tricky part is the Japanese connection. More than any other nation Japanese company's stick together and the biggest danger is that no matter what CYMI does it won't be able to build real customer loyalty with its Japanese clients, as long as there is a chance for them to do business with another Japanese company. The other side of this coin is that if the recession/depression scenario in Japan takes place I would think it would seriously weaken Komatsu's ability to compete. Without Japanese customers they don't have any chance.
<<5. The second most worrisome thing about the company is its balance sheet. Too much long-term debt. Not enough cash (yes, I know they have 5.50/share). Survivors in this zero-visibility cyclical high-fixed-cost industry must have pristine balance sheets. Servicing a high debt load when orders vanish can quickly push a company to the wall, no matter how bright their long-term prospects. Ask the Koreans. Debt-to-equity is 58%, far too high. Using cash to buy back shares is a discussion I've heard on several sem-equip threads. It won't happen, as it would be a very irresponsible action. The purpose of cash is to continue vital R&D during unforeseen downturns.>>
Yup, this is absolutely true. I agree completely with you that management's first responsibility in a situation like this is to make sure that they have enough funds to keep operating and to keep their R&D at the levels needed. Supporting the share price is secondary. If the company does the kind of business that seems possible the share price will take care of itself, eventually. But, if things go wrong with the international economy they may need the money. At the moment, I don't believe the debt is carrying a very high rate, but, that it accelerates as time goes on. Could be trouble...
<<6. Worst case scenario (no, I don't think it'll happen, but it might): Japan goes into depression, the U.S. has a recession, IT budgets are used to fix Y2K, no new killer-apps emerge, everyone decides their present computers will work just fine for a couple of years. Does Cymer have the resources to continue R&D, and enter the upturn (in 2001-worst case) with the best lasers?>>
This one bothers me the most. Japan is tettering on the brink of an economic disaster. If they really go into a depression it would have huge impact across the globe. The consequences of this are hard to predict, but, no of the possible scenarios are good for anyone and CASH will be the investor's best friend, as there is a substantial deflation likelyhood in that case. Alot of what happens here will depend upon the Chinese economy, if it starts to fade then Japan will be really screwed.
<<7. If such a downturn happened, which segments of semi-equip would still get some business? AMAT has the largest installed base, and gets a steady cash flow from service. Would test equipment (KLAC) do OK? Die-shrinks would probably continue; 300 mm/copper/balls/other blue-sky stuff would continue to get pushed out into the indefinite future. Who benefits most from this incremental movement to .25 => .21 => .18?>>
My feeling is that once the transition starts to these smaller sizes it will have a domino effect as semi mfg's will be forced to follow in order to remain competitive with yields and pricing. Assuming that Japan doesn't go into depression and U.S./European/Taiwanese company's start to make the transition it may force Japanese company's to go, too.
Well, that's a long reply.... interesting question, though. As I said earlier, the risks associated with Cymer are pretty large and not something that they have much ability to control. The gains could also be large, though, its not an easy call. |
