Friday, April 30, 1999
DJIA 10956.85 +78.47 (+0.72%) S&P 500 1350.64 +7.81 (+0.58%) Nasdaq 2565.32 +36.88 (+1.46%) Russell 2000 436.10 +3.25 (+0.75%) 30-Year Bond 95 4/32 -30/32 5.59 Yield

An Investment Opinion
by Dale Wettlaufer

Challenges in Thinking about Chip Equipment

I find the latest cycle in the semiconductor chip equipment industry very interesting. The latest round of price run-ups in the stocks of these companies was kicked off in part by an improved outlook for DRAM manufacturer Micron Technology (NYSE: MU). That has stalled out, though, as the price outlook for DRAM has moderated. This again points to the rule of chip densities and prices. The rule is that chip densities increase and prices per circuit go down. The exception is stable to higher prices. I really think the 1991-1994 time period has warped people's perceptions on that one.

Not that you can't make money in an industry where unit growth is high and prices are dropping, but when your competition consists of other nations -- by that I mean enterprises that get direct or indirect financial support as a course of national fiscal policy -- it's pretty darned tough to compete effectively. This should make things work nicely for suppliers of chip fabrication, testing, and assembly equipment, but it doesn't work in such a linear fashion. If you pack three times the amount of chips on a wafer and wafer yields improve (the number of good dice per wafer increases), the number of wafers processed doesn't increase in tandem with the end-unit increase in semiconductor consumption.

Mitigating that, larger wafer sizes do necessitate new wafer processing equipment, leading to a new spare parts and service annuity stream. Smaller semiconductor feature sizes demand more precise wafer probing equipment, more dice produced require more assembly equipment, and finer feature sizes require better yield enhancement equipment and photolithography equipment. What this all means is that you can't just extrapolate end-market growth into the sales and cash flows of the companies in this sector. There's a lot of specialized knowledge required here, and that's not so much attained through paying a ton of money to get it, but through disciplined research.

In other words, don't just assume Lam Research (Nasdaq: LRCX) is in the same competitive position as Applied Materials (Nasdaq: AMAT), because it isn't. KLA-Tencor (Nasdaq: KLAC) or Cymer (Nasdaq: CYMI) are going to be affected a lot differently by trends in materials sciences than, say, Kulicke & Soffa Industries (Nasdaq: KLIC). Bidding stock prices on the latest book-to-bill (BTB) isn't the answer, either -- not when the components of book-to-bill are ignored. If bookings are down 50% and billings are down 45%, sure, you might end up with a super-1.0 BTB ratio, but you don't put ratios in the bank. You put dollars in the bank. Single-point analysis, such as looking at the book-to-bill and not the components of the BTB on a multi-year continuum, or pricing a company in this industry on just one year's expected earnings without doing a multi-year discounted cash flow analysis are analytical methods that are going to lead you into trouble.

Having an undeveloped worldview on the ecosystem into which these companies fit is also going to handicap you against the lead steers in this industry. If you're trading the trend here, you're at the mercy of sudden inflection points that occur in technology-driven industries. I guess you can recover and shift your trading hypothesis, but for investors, I don't have any idea how anyone can get involved without developing a larger framework and valuation methodology. Slapping a P/E on estimated year 2000 earnings and then pricing a company and an industry off historical valuation points is definitely not valuation work.


Highly sought-after cable TV operator MediaOne Group (NYSE: UMG) advanced $1 3/8 to $80 3/4 following reports in The Wall Street Journal that the company entered into confidentiality agreements with both Microsoft (Nasdaq: MSFT) and America Online (NYSE: AOL). The pacts open the door to merger talks in the wake of AT&T's (NYSE: T) counter-offer to Comcast's (Nasdaq: CMCSK) earlier bid to acquire MediaOne. Any new offers would have to come by May 5, and Microsoft and AOL likely would make a bid in conjunction with Comcast.

Aerospace and aircraft giant Boeing (NYSE: BA) ascended $1 1/4 to $41 5/8 on news in The Wall Street Journal that it is in serious talks to acquire a controlling stake in the $2.4 billion Ellipso satellite mobile-phone project. Privately held Ellipso holds a Federal Communications Commission (FCC) license to launch a 17-satellite system. When Boeing became the prime contractor and integrator for the project a year ago, it made a $50 million equity investment in Ellipso.

Argentine oil company YPF SA (NYSE: YPF) jumped $6 to $41 15/16 after Repsol SA (NYSE: REP), Spain's giant oil, natural gas, and chemicals group, made an unsolicited $13.5 billion bid to buy the remaining 85.01% of YPF it doesn't already own. Repsol moved up $15/16 to $16 1/2 this morning; for more on the news, head back to this morning's Breakfast With the Fool.

Generic pharmaceutical maker Barr Laboratories (NYSE: BRL) bottled $1 1/4 to $32 after the FDA approved the launch of 150mg and 300mg generic versions of Bristol-Myers Squibb's (NYSE: BMY) Desyrel tablets. Barr now makes four dosages of the drug, used as an antidepressant and a hypnotic agent for the elderly.

E-mail direct marketing company MessageMedia (Nasdaq: MESG) grabbed $3 to $17 after website community operator GeoCities (Nasdaq: GCTY) hired MessageMedia to deliver messages, newsletters, and other items to its members. MessageMedia, which yesterday named Larry Jones its CEO, said Q1 losses were $0.17 -- well ahead of last year's $0.38 loss.

Marketing information provider Market Facts Inc. (Nasdaq: MFAC) won $4 11/16 to $30 9/16 on news that London's Aegis Group agreed to buy the company for $31 per share in cash, a nearly 20% premium to yesterday's closing price.

Information services company EDS (NYSE: EDS) got $1 3/4 to $53 1/16 after reporting first-quarter EPS of $0.36, before special charges and gains, down from $0.43 in the same year-earlier period and right in line with estimates. During the quarter, the company recorded restructuring and other pre-tax charges totaling $379.8 million, primarily to cover costs related to laying off 5,200 employees, asset writedowns, consolidation, and the discontinuation and exit of certain service offerings.

Laser eye surgery firm Summit Technology Corp. (Nasdaq: BEAM) jumped $2 5/16 to $17 1/8 following yesterday afternoon's news of Q1 EPS of $0.08, up from $0.01 last year and better than the nickel estimate one analyst gave First Call. Summit also said it closed the acquisition of Autonomous Technologies Corp. (Nasdaq: ATCI).

Telecommunications services provider GST Telecommunications (Nasdaq: GSTX) was lifted $1 1/8 to $13 after selling its multi-tenant residential services division to a group of undisclosed buyers. "We are not only eliminating a segment of the business that for us has been a financial burden," said CEO Joe Basile, "but freeing up resources that can be dedicated solely to our business customers.'' Q1 losses were $1.46 per share, a penny off First Call's mean estimate.

Time-share purveyor Fairfield Communities (NYSE: FFD) rose $7/16 to $13 3/16 after Ryan Beck analyst Dennis McAlpine told Business Week's "Inside Wall Street" column the stock should trade in the high $20s, calling it an attractive buyout candidate. Also moving thanks to the column were shares of financial printing powerhouse Bowne & Co. (AMEX: BNE), worth twice their current price according to money manager David Rocker. Bowne was up $1 7/16 to $18 15/16.

Radioactive and hazardous waste management company ATG Inc. (Nasdaq: ATGC) improved $1 3/8 to $8 7/16 after Prudential Securities started the company with a "strong buy" rating.

Earnings Movers

Adaptec Inc. (Nasdaq: ADPT) up $2 13/16 to $24 7/8; fiscal Q4 EPS $0.36 vs. $0.20 last year; estimate: $0.30

CompuCredit Corp. (Nasdaq: CCRT) up $2 3/8 to $16 3/8; Q1 EPS $0.57 vs. $0.15 last year; no estimate

Compuware Corp. (Nasdaq: CPWR) up $3 1/16 to $26 3/4; fiscal Q4 EPS $0.31 vs. $0.20 last year; estimate: $0.29

Corinthian Colleges (Nasdaq: COCO) up $6 1/2 to $19 1/4; fiscal Q3 EPS $0.25 (before charge) vs. $0.06 last year; estimate: $0.14

Cytyc Corp. (Nasdaq: CYTC) up $1 3/8 to $20 3/8; Q1 EPS $0.04 vs. loss of $0.37 last year; estimate: loss of $0.08

EarthWeb (Nasdaq: EWBX) up $3 1/2 to $54 5/8; Q1 EPS loss of $0.82 vs. loss of $0.27 last year; estimate: loss of $0.93

InfoSpace.com (Nasdaq: INSP) up $22 3/8 to $141; Q1 EPS loss of 0.03 vs. breakeven last year; estimate: loss of $0.14

Minnesota Mining & Manufacturing (NYSE: MMM) up $4 5/8 to $90 1/4; Q1 EPS $0.95 vs. $0.98 last year; estimate: $0.91

National Steel (NYSE: NS) up $9/16 to $9 9/16; Q1 EPS loss of $0.58 vs. profit of $0.14 last year; estimate: loss of $0.63

Penske Motorsports (Nasdaq: SPWY) up $1 to $37; Q1 EPS loss of $0.21 vs. loss of $0.16 last year; estimate: loss of $0.21

ThrustMaster Inc. (Nasdaq: TMSR) up $1 3/8 to $20 1/2; Q1 EPS loss of $0.05 vs. loss of $0.29 last year; estimate: loss of $0.10

W.R. Grace & Co. (NYSE: GRA) up $1/4 to $15 3/8; Q1 EPS $0.23 (before gain) vs. $0.15 last year; estimate: $0.21


High-end targeted home furnishings and hardware retailer Restoration Hardware (Nasdaq: RSTO) was tarnished by a $9 1/2 loss to $14 7/8 after NationsBanc Montgomery Securities cut its rating on the company to "hold" from "buy," citing concerns that the firm may fall short of analysts' Q1 and possibly even Q2 estimates. For Q1, the Zacks mean estimate calls for a loss of $0.04 per share. Goldman Sachs also lowered its rating to "market perform" from "recommended list."

Farm equipment manufacturer Deere & Co. (NYSE: DE) was ploughed under for a $5 1/16 loss to $40 1/16 after saying that aggressive discounting by rivals and reduced farm equipment demand caused by slumping commodity market prices will result in a sharper-than-expected fiscal Q2 decline in volume sales. The company sees quarterly volume sales down 20% year-over-year, worse than the 13% slide previously expected, while full-year volumes will decline 18% to 20%.

Information technology consulting and software services firm Tier Technologies (Nasdaq: TIER) was knocked down $2 11/16 to $5 1/4 after posting fiscal Q2 EPS of $0.05, down from last year's $0.06 and below the First Call mean estimate of $0.16. The company blamed the shortfall on higher investment spending in the period and increased general and administrative expenses, which resulted in operating margin slippage to 3.1% from 6.6% a year ago. Adams, Harkness & Hill reduced its opinion on the company to "market perform" from "strong buy."

Canadian biotechnology company BioChem Pharma (Nasdaq: BCHE) slid $1 1/4 to $20 3/4 after reporting that sales of its recently launched Zeffix/Epivir-HBV chronic hepatitis B treatment were $800,000 in the first quarter, less than one-tenth of what analysts had been anticipating. The company reportedly said during a conference call that it still projects revenues from the drug will be $100 to $150 million this year despite the slow start.

Individual and group life insurer and reinsurer ReliaStar Financial Corp. (NYSE: RLR) slumped $4 1/8 to $37 5/16 after reporting Q1 operating EPS of $0.70, up from last year's $0.66 but below the First Call mean estimate of $0.77. The company blamed the shortfall on an "unfavorable claims experience" at its reinsurance business. Both J.P. Morgan and Prudential Securities downgraded the stock this morning.

Digital audio and video applications integrated circuit maker Zoran Corp. (Nasdaq: ZRAN) was zapped $2 3/4 to $10 5/8 after posting Q1 EPS of $0.01 versus $0.06 a year ago, missing the Zacks mean estimate of $0.05. The company blamed the shortfall on the loss of a "sizable" licensing agreement, which Zoran said was "repudiated" at the end of the quarter.

Coal company CONSOL Energy (NYSE: CNX) was shafted for a $1 1/16 loss to $14 15/16 in its first day of trading after selling 22.6 million shares in an initial public offering at a price of $16 per share.

Online live communities operator Mpath Interactive (Nasdaq: MPTH) gave back $7 11/16 to $42 15/16 after rising 181% in its first day of trading yesterday after the company sold 3.9 million shares in an initial public offering at a price of $18 per stub.

Console and PC video game developer Adrenalin Interactive (Nasdaq: ADRN) dropped $2 1/8 to $6 1/8 after agreeing to acquire privately-held McGlen Micro Inc., an online supplier of computer hardware to small businesses, for an unspecified amount of stock.

Satellite systems designer Orbital Sciences Corp. (NYSE: ORB) lost another $1 1/8 to $20 3/8 after falling 26% yesterday following its report of a loss of $0.43 per share in the first quarter, which was much worse than the loss of $0.12 per share expected by analysts.Challenges in Thinking about Chip Equipment


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