3050 Zanker Rd.
San Jose, CA 95134
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?