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Technology Stocks : Varian Semiconductor Equipment Associates -- VSEA -- Ignore unavailable to you. Want to Upgrade?

To: Sherman Chen who wrote (26)	5/6/1999 2:44:00 PM
From: Duker	Read Replies (1) \| Respond to of 1929

Yes. Really comes down to the fact that the market has not been able to put a good number on either the near term earnings prospects or the "peak cycle earnings." The fact of the matter is that a lot of very smart people bought VAR (and some dumb one also). Two of the three pieces of the business were worth $xx.xx (a substantial premium to the price of the pre-split VAR). The SemiCap piece became a throw-away ... "as long as we get book value for it ... we will be happy ..." (i.e., $6.35 or so ...) The trading range reflects a couple of random When-Issued trades on the high side and some earnest sellers on the low side. At $12-13 is the stock interesting? It depends. You can go back and try to look at what VSEA earned during the last cyclical peak and work from there. In 1996, they earned $79.3mm net on $667.2 in revenues. These revenues and net income numbers included the business that was sold to NVLS (that would have worked out, without adjustments, to $2.64/share). What are peak earnings of a former subsidiary in a cycle that does not include a major piece of the revenues ... oh, and you lose some licensing revenues to boot ??? If you simply assumed that $425mm was a reasonable revenue number at some point during the cycle with a 10% net to sales bottom line (both should be conservative) ... you get $1.42 in EPS. The R&D and SG&A costs of a newly liberated entity are as slippery as one could imagine. The Gross Margin is equally as difficult to get a handle on ... especially in this environment. Could you get up to $2.00 in EPS? Possible ... but the EPS number is only half of the equation. Will someone pay only 10x's the $2.00 or 15x's the $1.42? Either way, you get to $20 (whether this is appropriate, you be the judge ... for all I know, $13 is a full valuation). Looking at Enterprise Value to Revenues: with 30mm shares and a stock price of $13, VSEA has a Market Cap of $390mm. There is $100mm of cash on the Balance Sheet, leaving you with a $290mm Enterprise Value. This is only 85% of trough sales. That translates into a buyer paying $.85 for each $1.00 in sales ... but, so what? It all depends what you think the sustainable earnings per dollar of sales today are worth ... In the end, FY00 doesn't necessarily hold any significance at all. The company's earnings power may manifest itself much earlier or much later. The business model for a recent spin-off is only a rough approximation and the ultimate model ... moreover, Net Discretionary Cash Flow through a cycle is more important. From a Street/catalyst perspective ... NO CAPACITY ADDITIONS, NO IMPLANTERS. When capacity comes on line, people will rethink this business. Meanwhile, they have a very solid market share with good technology and good people (getting better as the engineers move down the road from ETN to a company where you can get real stock that performs if you business performs and your product is good!) for about 2x's book and less than one times trough sales. We'll see how it all works out. --Duker