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Technology Stocks : komag -- Ignore unavailable to you. Want to Upgrade?

To: Frodo Baxter who wrote (700)	7/12/1998 4:20:00 AM
From: Tom Simpson	Read Replies (1) \| Respond to of 848

You suppose "one time" actually means one time do you? :o)

To: Frodo Baxter who wrote (700)	7/12/1998 11:39:00 AM
From: E_K_S	Respond to of 848

Hi Lawrence - Based on this press release dated June 2, 1998 (http://biz.yahoo.com/prnews/980602/ca_komag_q_1.html) "... a one-time charge to earnings of $135-185 million in the second quarter..." results in a drop in book value of about $145 million or $2.75 per share. Therefore, adjusting the $11.85 per share book value from the S&P March 1998 report, we arrive at a new value of $9.14 per share (and falling). This is what management has admitted to based on estimates made back in June. It has been my experience that management is very conservative (or may not have all the cost information) and investors should expect additional adjustments downward. The bulk of the charge (ie $2.75 per share) has been made, but I would not be surprised to see additional charges totaling another $1.00 per share as they move through the equipment upgrade cycle. An earlier post said that the new technology is working only at a 20% success rate ("...they have an 80% fallout ratio...they're working on getting it up to 70% or 80%...") and additional proto typing and fine tuning is still required. As they wait and fine tune their equipment, KMAG continues to burn cash. The consensus (http://quote.yahoo.com/q?s=kmag&d=r) earnings estimate for 1998 is for a loss of $2.36 per share. This number probably factors in this transition upgrade period but may be based on old information. Therefore, book value should drop another $0.59 per share each quarter until they complete the equipment upgrades. Now, even if they can control their manufacturing supply channel, they still continue to have a problem with product demand. This is further complicated due to the fact that four customers make up 90% of their net sales. From the most recent 10-Q:(http://sec.yahoo.com/e/l/k/kmag.html) "...During the first quarter of 1998 four customers accounted for 90% of consolidated net sales: Maxtor Corporation (33%), Western Digital Corporation (33%), Quantum Corporation, together with its Japanese manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") (14%), and Seagate Technologies, Inc. (10%). The Company expects that it will continue to derive a substantial portion of its sales from relatively few customers..." My investment decision is based on Risk/Reward. It still is not too clear to this investor that the bottom has been reached. I am not concerned about valuation at these levels (ie $ 5 15/16) but rather what the time frame will be to (1) get the new equipment technology working at 90% or better and (2) when the overall industry demand will turn the corner. My guess is that with the Asian recession still in force, it may take as long as three more quarters before a significant turn in product demand is seen. EKS P.S. It will be interesting to watch to see exactly what way management structures the new equity especially if it completed through a private third party. I would not be surprised to see a new class of preferred stock issued that pays a dividend and would be convertable into common at higher prices. They always seem to get a better deal than the common shareholder since they are taking more risk at this stage in the company's growth.