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Stocks For Mom
by TMF Templr

Ultratech Stepper, Inc.
(Nasdaq: UTEK)
3050 Zanker Rd.
San Jose, CA 95134
(408) 321-8835

Hello Mom,

Here's a stock you may find interesting. Your investment skills are excellent, so I'll jump right in.

ULTRATECH STEPPER (Nasdaq: UTEK) manufactures low-cost lithography units used by semiconductor and thin-film disk drive manufacturers throughout the world. Earnings growth has slowed at the company in the past 12 months as new orders from semiconductor manufacturers have completely flattened out due to a reduction in capital expenditures. Ultratech makes steppers, which create pictures on each layer of a semiconductor chip that correspond to the circuit pattern. Once a favorite of momentum investors, Ultratech was recently abandoned by Smith Barney analyst Min Pang.

Pang went to neutral on the shares because of a shift in the semiconductor manufacturing industry away from low cost-of-ownership steppers like Ultratech's toward deep-ultraviolet laser steppers manufactured by the likes of SILICON VALLEY GROUP (Nasdaq: SVGI), ASM LITHOGRAPHY (Nasdaq: ASMLF), Canon and Nikon. Most industry analysts see total stepper sales falling to 1,200 this year from roughly 1,350 in 1996. Although Ultratech has been doing more business with the drive manufacturers, conventional wisdom holds this will not compensate from this shift by semiconductor manufacturers.

HERE'S WHAT WE'RE HOPING FOR: With $166 million in cash and $215.4 million in working capital, Ultratech is hardly in danger of going bankrupt. In fact, with only 21.5 million shares outstanding, the company's $395.1 million market capitalization is 42% cash and 54.5% working capital. Net cash, the company trades at 1.3 times sales. The stock currently trades at only 11.6 times trailing earnings. Estimates call for only $1.41 EPS this year, a decrease of $0.15 EPS versus the prior year, but for $1.67 EPS in fiscal 1998. Given the current valuation and the substantial cash and working capital cushion, it would seem that much of the risk has been removed from Ultratech Stepper due to the extraordinarily low valuation. The stock went as low as $14 last summer when institutional investors began divesting the shares and this seems to be the limit of the downside risk here.

HERE'S WHAT TO LOOK OUT FOR (Sort of): Although Ultratech will have negative earnings and revenue comparisons for the next two quarters, most of this bad news has already been factored in the price. Should the low-end of the lithography turn faster than expected, investors will be very quick to discount this into the price in two or three quarters. With only a two-quarter wait until the turnaround in the sector, it seems that now is the time to begin initiating positions in semiconductor equipment manufacturers with large cash hoards in growing segments of the industry. It is entirely reasonable to think that in seven quarters Ultratech will trade at 16 times trailing earnings, or $26 3/4. This would represent a 23.9% annual return from here.

That would be pretty good, eh, Mom?



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