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The original version can be found at http://www.techstocks.com/~wsapi/investor/newsletter-57-2 To get The Internet Financial Connection newsletter e mailed to you for FREE, send an e mail to <"mailto:ifc-request@mLists.net"> and write "subscribe" in the body of the letter. Sun Microsystems Jim Cornell of the Country Wide Equity Fund (800-438-9060) provides the following stock idea on Sun Microsystems (SUNW 44 7/8). Below is the write up. Sun Microsystems primary focus is on large scale Unix networking type computer systems. They try to be a total solutions provider for a corporation from workstations to networks including internet applications. The 900 pound gorilla Microsoft offers a competing product called Windows NT. "Microsoft's Window's NT is making a lot of inroads into the Unix base but that is in the lower end line, it's a mission critical application," says Jeff Cornell of the Country Wide Equity Fund, "Some corporations will be running both systems side by side but I don't think Windows NT will attack what Sun is successful on in the Unix side which is the hard-core mission critical applications." Jeff notes that Sun has new and powerful Unix based systems and demand for them "has been huge." Some of them go as high as $1 million. "The things people can do on them and the speed that they can do it with is just amazing." I think it was more political than anything Last Friday, Hewlett-Packard announced that they would create their own version of Sun's popular software Java. Sun's stock dropped about 2 points on the news. Jeff mentions that Hewlett has "Big" competition with Sun primarily in the server market place which is where most of Hewlett's potential revenues are lost to Sun. At the same time Hewlett must pay a licensing fee for Java. What motivated them to do this is (1) they do not like paying a licensing fee to Sun for Java and (2) Hewlett has always rallied behind Microsoft (who will use Hewlett's new software) which is an enemy of Sun. "I think it was more political than anything. What we have seen so far is that Hewlett is going after what they call the "Virtual Machine" which is the way Java interacts with any type of device primarily in the embedded market like TV sets and consumer appliances. Java represents less than 1% of sun's revenues so there is little or no impact on Sun. They took a whack because of this but see it as a buying opportunity if anything else," he says. "In the world of technology when you have a stock growing at 20% a year and trading at a PE of 20 times this years estimates (ending in June), that is pretty favorable," says Jeff. He believes that the longer term prospects of what Sun can do will ultimately drive their stock up and would not be surprised to see it touch the all-time high of $53 in the not too distant future. Faro Technologies Rick Lane of the FMI Focus Fund (800-811-5311) provides the following stock idea on Faro Technologies (FARO 12 7/8). Below is the write up. (Rick's fund has returned 69% over the last 12 months) Faro Technologies is the maker of computer aided manufacturing measuring tools. One popular product is called the FaroArm. This product is basically an articulated arm that can move in various directions and measures objects in 3D space. Through specialized software, it transmits measuring data into to a computer and is integrated with CAD (computer aided design) and CAE (computer aided engineering) software. "To date there is not another product like this, it is very unique," says Rick Lane of the FMI Focus Fund, "In the past there was no way to measure objects in 3D space. They are neat products and they run about $50k a pop." If a car door on an assembly line stopped fitting correctly, historically what you had to do is stop the assembly line pull the door off and go measure the door against the die. "This took an enormous amount of time and it was an expensive procedure to try and rectify that problem. With one of these arms you can mount it anywhere, take the measurements against that door, run it against the computer aided engineering and design and see where the problem is," says Rick. Another use for the FaroArm is that it can be used in reverse engineering. If an engineer is interested in a product that someone else has made they can copy it and create a virtual model on a computer. Faro has a terrific balance sheet Faro has had a very impressive list of customers which include General Electric, Lockheed, Ford, Chrysler, Honda, Caterpillar and Toro. A French firm called Romer makes a competitive product but Rick believes their machines are more expensive and not as robust as Faro's and that they have the market to themselves. "The penetration of using this type of measuring machine is just getting started, they have an amazing product!" "Faro has a terrific balance sheet with $35 million in cash. They should have $30 million in revenues and earn $0.50 this year and have $43 million in revenues and earn $0.68 next year. They are growing at 40% and selling at 25 times earnings. For a company that is growing at 40%, if I can buy it at 25 times earnings, that strikes me with a real opportunity. Faro has a strong management team and their stock could hit $20 going 10 months out," says Rick. ADC Telecommunications Ingrid Hendershot of Hendershot Investments provides the following stock idea. An annual subscription is $45 for 4 issues. You may contact them by phone at (703)-361-6130. ADC Telecommunications (ADCT 25 3/16) is a recent selection from their newsletter. Below is the write up. "ADC Telecommunications designs, manufactures, markets and integrates communications hardware and software systems. These systems are used by global service providers such as the Regional Bell Operating Companies, post telephone and telegraph (PTT's), and cable TV operators to deliver communications services to their customers. The company also provides products used in enterprise networks for connection and access to the public network. Headquartered in Minnesota, the company has manufacturing, sales or services offices in seventeen countries around the world with more than 6,000 employees worldwide. Steady Long-Term Growth Founded in 1935, Audio Development Corp. started out making rather humble machines called audiometers to test children's hearing. Since then, ADC Telecommunications has evolved into a high-tech company, benefiting from the strong global growth in the telecommunications, wireless, cable TV and Internet Industries. Over the last decade, sales have steadily risen. Growth has accelerated in the last five years with revenues and net income both ringing up better than 30% compound annual gains. During 1997, ADC's sales rose 41% crossing the billion dollar mark for the first time. Operating income joined in the celebration by also jumping 41%. High Growth Opportunities Further growth opportunities await ADC Telecommunications, as both business and residential customers clamor for high-speed network services. Telephone companies, cable television operators, wireless network providers and other public network providers are feverishly building the infrastructure required to offer higher speed data, video and telephone services, as well as Internet, entertainment and other interactive services. ADC telecommunications offers a broad range of products and services that enable its customers to construct and upgrade their telecommunications networks to support this increasing user demand. ADC's focus is on improving network access by clearing the bottlenecks in the local loop-the portion of the public network from the serving office to the handset or terminal equipment at the home or business. ADC recently announced a breakthrough in Ethernet technology, which speeds data transmission and significantly lowers the cost of offering voice, video and telephony services in metropolitan networks. In addition to developing sophisticated products and technologies, ADC also provides in-depth systems integration services to maximize the performance of networks. During 1997, ADC's systems integration sales shot 166% higher. ADC Telecommunications is committed to quality as the company continuously strives to meet or exceed customers' expectations. Evidence of success in this regard is the recent receipt of the "Outstanding Supplier of the Year" award from Lucent Technologies, which selects three suppliers yearly for this coveted award. ADC Kentrox's selection was based on yearly performance for quality, delivery and cost. Strong Financial Position Over the last 10 years, ADC has maintained a strong financial position with little or no long-term debt. Cash flow generated from operations has more than doubled in the last five years. ADC continues to significantly invest in facilities and systems upgrades to support further growth. ADC reported its first quarter results for fiscal 1998. Sales growth slowed to 12% with net income flat. Seasonality factors typically impact first quarter performance as customers reduce spending due in part to the holidays. ADC's stock price pulled back and now is in line with fundamentals. This provides long-term investors with a good buying opportunity into ADC and a way to capitalize on the construction of the Information Superhighway. Going forward, ADC expects improved results. Based on current product mix, orders and shipments in each of ADC's business units, 20% growth in overall revenues and earnings during the remainder of 1998 appears achievable. ADC's stock is volatile and only suitable for risk-tolerant investors." Highlights on SI: "Are we there yet?" - a commentary on LSI Logic Shane Forbes is an active participant at the LSI Logic is a good buy thread here on SI. Shane provides the following commentary on LSI Logic (LSI 23 3/16). Below is his write up. "Are we there yet?" - a commentary on LSI Logic "Two and a half years ago, LSI Logic (NYSE: LSI) hit an all-time high of $62. After swooning in 1996, it recovered briefly to $47 last year, only to then promptly fall again and settle at where we are today - $22 - an ugly 65% off the all-time high. What happened to LSI, once the darling of go-go funds like Brandywine and 20th Century Ultra, once believed to be so strong that it was considered immune to the 1996 business downturn? More importantly, is LSI finally ready to live up to its potential? The Company: LSI is a specialty semiconductor designer and manufacturer. Most investors think of the company as a manufacturer of ASICs (Application Specific Integrated Circuits - logic chips that are targeted for specific applications). However LSI is much more than your run-of-the-mill ASIC company. First LSI's focus is on high gate count designs - average is now 400,000 gates and top tier customers are designing with well over 750,000 gates. Second, not only do LSI's traditional ASICs have a high degree of customization, but the company is also a leading manufacturer and one of the few pure plays on Cell Based ASICs and Systems On A Chip (SOC). LSI targets leading trendsetting customers in high volume growth areas. Their customers include many of the big names in their 3 targeted segments of next generation consumer electronics, communications (networking, telecommunications, and soon wireless), and computing (storage, workstations, and servers). LSI had revenue of $1.3 billion in 1997 split roughly equally among the 3 segments. Earnings were $159 million or $1.11 per share. Their biggest customer is Sony, accounting for about 18% of revenues. Some of their other customers include Minolta, Panasonic, JVC, Matsushita, Philips, Sanyo, RCA/Thomson in the consumer area; Cisco, Cabletron, Lucent, Northern Telecom, Ascend, 3Com, Motorola in the communications area; and Sun, Silicon Graphics, Compaq, Intel, EMC, Hewlett Packard, IBM, Seagate in the computer area. The highly concentrated customer base translated into a severe inventory correction Their business model calls for cooperating with the customer's chip designers to design highly complex "customer specific" chips with a high degree of standardization and at the same time customization. LSI's advantages are rapid time to market, experienced design teams, a superb library of cores (called COREWARE) and leading edge process technology (0.18-effective gate length this year and 0.13-effective next year) with high volume manufacturing capabilities (2 high volume fabs in Japan and 1 more soon to come in Gresham, Oregon). In the last 2 years Execution slowed and Perception suffered: One of LSI's problems was that, as complexity increased, high density designs were taking very long to complete - according to Wilf Corrigan, LSI's CEO, as much as 5 times longer than originally anticipated. The highly concentrated customer base translated into a severe inventory correction. Another problem that dogged LSI was investor concern that they would lose the next generation Sony PlayStation design. The DVD growth engine also did not materialize. The strong dollar and weak demand have meant essentially flat sales. High R&D costs - mushrooming from 123 million in 1995 to 226 million in 1997, an 84% increase, has hurt earnings. An earnings warning in Q4 last year was the last straw. The stock was immediately abandoned by analysts and investors and has been in a fairly narrow trading range since. (For the coup de gras, for totally inexplicable reasons, LSI is somehow associated with more commodity companies like MU. This connection persists even today. Recently the Wall Street Journal's Interactive Journal apologized for a note that "suggested" LSI is a DRAM company!) The company will likely have several high profile design wins here However times they are a changing: The design tools vendors have recognized the problem with high density designs and are addressing it. LSI also came out with a new set of tools that reduce design time 75%. LSI is one of the top 5 semiconductor companies in the networking area. This segment, according to Mr. Corrigan and highlighted in a recent article in Red Herring, is undergoing a paradigm shift favoring LSI's type of chips (as opposed to PLDs). Recent high profile wins at Cisco for their next generation GSR and Compaq for the Netelligent switches appear to validate this paradigm shift. LSI's entry into the wireless area is with a GSM chip that incorporates all the analog and digital circuits on one chip - a feat that was not thought possible. The company will likely have several high profile design wins here. The market for wireless chipsets is expected to grow at better than 30% a year to $1.5 billion in 2000. A CDMA chip is probably in the works. From a recent Dataquest article, a comment about LSI's position in the consumer area: "LSI Logic's aggressive pursuit of the Next-Generation Consumer Electronics segment has allowed it to capture nearly 13 percent of this market segment [tops among chip companies and 2nd overall behind Sony]. LSI Logic is a leading player in five of the seven major product segments in this category with major contributions in DBS Satellite Set-top Boxes and video games. This strong, diversified market presence places LSI Logic in a very solid competitive position in a market that Dataquest forecasts will experience very high growth". There is support from Intel and Microsoft for PC DVD A recent Business Week article said the next generation PlayStation is slated for Y2000 (and therefore not a threat to LSI's business at this time). The PlayStation installed base, currently at 30 million, may, if the same growth rate persists, hit the 60 million mark within the next 12 months. This might mean LSI will produce somewhere around 20-35 million chips for Sony this year up from 8 million in 1996. LSI also does Sony's DVD chip and the relationship with Sony appears to be good. The Set-top Box market, where LSI is 2nd overall with 28% of the market, appears to be coming back after a couple of slow quarters. PC DVD is entering the mainstream with $149 drives being offered by Creative. Most if not all PC manufacturers are including DVD drives in their higher end and mainstream computers. PC DVD is not yet faced with the issues of competing standards and therefore acceptance should be rapid. The market for DVD chips should be around 80 million chips for PC DVD and around 30 million for the other DVD chips by 2001-2002. PC DVD should replace CD over the next 3-5 years. There is support from Intel and Microsoft for PC DVD. LSI is a leading developer of DVD decoders and has recently started making DVD cards. Though progress in the consumer DVD market has been slow, LSI is beginning to be a bit more aggressive than they normally are - even going to China to see if what C-Cube did with video-CD can be copied! A recent article in Barrons highlighted just how significant a DVD supplier LSI is. Digital cameras are another high growth area where LSI is extremely well positioned. A CAGR of 65% per year is expected for the next 3-5 years. The LSI implementation called DCAM is about a year (i.e., a lifetime in chip years) ahead of the industry. LSI has perhaps 5 or more of the top 10 manufacturers here. Unlike the 1st generation devices, the 2nd generation digital cameras are gaining rapid customer acceptance. LSI's fabs which were once at 55-65% utilization are now operating at 80% utilization In Fibre Channel, LSI said in their last conference call that they have 80% of the design wins. Their implementation is superb and since networks almost by definition require oodles of connected storage, fibre channel storage should be a rapidly growing market and one in which LSI should get a large portion of the pie. Fibre Channel end market is expected to explode to around $20 billion by 2002. ICE places the standard cell market growth rate at 30% a year for the next 5 years. LSI's standard cell based solutions are about 50% of total revenues now and growing at perhaps a 35+% clip. DCAM, GSM, and DVD are all cell based solutions. LSI's fabs which were once at 55-65% utilization are now operating at 80% utilization. LSI considers this extremely good. About 40% of the orders are currently on "expedite". Another good sign. It looks like after 2 delays Gresham is going to open this summer. LSI has just announced a new process technology - G12 - capable of putting 223 million transistors on a single chip - a sizable increase from the G11 64 million transistors per chip. Analog and digital cores can be mixed on the same chip. Gross margins are holding up well at around 45%. The recent purchase of MINT adds design talent. Though SOCs have been regarded with skepticism by many, it looks like LSI may have the last laugh. Complexity and the establishment of standards across many fields means that if a company wants to develop products fast yet differentiate them from their competitors' products they have to base development on precisely the way LSI has been doing business for the last few years - a set of cores for the standard part mixed with customer/proprietary parts for product differentiation. Though prior generations of true SOCs have been | ||||||||||||
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