Boring Portfolio

Boring Portfolio Report
Friday, January 26, 1996

Kulicke and Soffa Industries (NASDAQ:KLIC)
2101 Blair Mill Rd, Willow Grove, PA 19090
Phone: 215-784-6000
Closing Prices, January 26, 1996: Bid $22 Ask: $22 1/4 (up 3/4)

Trade: Buying 200 shares, January 29, 1996

THE COMPANY

If you told people who didn't already know about Kulicke & Soffa that it was a medium-sized company based in Willow Grove, PA, that made dicing saws and turbo-ball bonders, their reaction would probably be, "Oh, that's nice." They might think you were talking about kitchen equipment--maybe something like ginsu knives and veg-o-matics.

Not quite--although the company certainly is cookin', and the stock has been feeling some heat.

To put it simply, Kulicke & Soffa is the world's largest producer of semiconductor assembly equipment--and growing. It is twice as large as its nearest competitor, which is Japanese and has been hampered by the strong yen/dollar ratio and a lagging domestic economy recently.

K&S funds R&D that consistently produces the leading edge equipment that semiconductor assemblers require to produce increasingly complex chips. As the folks at the "Infrastructure" Web-site put it recently, "You cannot bring a circuit into the world without the tools K&S provides."

More specifically, K&S makes wire bonders (74% of total sales), which are used to connect extremely fine wires to components within semiconductors. It also makes dicing saws, which cut silicon wafers into individual chips; die bonders, which affix the chip to the semiconductor package; and accessories used in the semiconductor-manufacturing process. In addition, the company provides spare parts and maintenance, repair, and training services related to its equipment.

The semiconductor industry is expected to double in size by the year 2000, with upwards of 225 new fabrication plants coming on stream and substantial equipment upgrades required at many existing fabs. K&S's next generation wire bonder (the Series 8000) will constitute the new industry standard when it is introduced later this year. The company's market share in this niche is currently estimated at 43%.

Last month, Advanced Semiconductor Engineering (ASE), perhaps the world's largest assembler of semiconductor chips, ordered 400 K&S model 1488 turbo gold ball bonders for a major expansion of one of it's Taiwan facilities. K&S has produced over 1700 1488's since their introduction in Oct. 1994.

THE STOCK

Great company, but what about the stock? Permit me to quote from the report on KLIC that S&P issued about three weeks ago: "[T]he stock appears to be grossly undervalued given the company's future prospects." Leaving aside the analyst's writing style ("future" prospects are the best kind to have), I couldn't agree more--nor could my colleague Randy Befumo (MF Templar), who has covered this stock in great detail inside his "Neocontrarian" folder (highly recommended).

The stock is currently trading at barely 10X trailing earnings--and less than 7X estimated earnings of $3.23 for the four quarters halfway completed (which is what I tend to focus on). Yet EPS is expected to grow 47% in FY96 (ends September), and another 23% in FY97. (You can get full details from First Call with the "Company Research" feature on AOL.)

So why is KLIC such a bargain? Good question. Part of the explanation, of course, is the panic sell-off of anything and everything related to the semiconductor industry, with the good stuff getting sold off right along with the less good stuff. On top of that, K&S had its own special glitches.

As MF Templar ably details in his folder, the company reported last fall that it had detected a small and highly technical flaw in some of its latest wire bonders (none of which had been shipped to customers). The company soon came up with a software fix to correct the problem, but by then the stock had dropped faster than a gold turbo ball.

Simultaneously, the company announced that it would delay a secondary stock offering to cover costs of its acquisition of American Fine Wire. Financially, that was not a problem for the company, since the bank was happy to extend the short-term loan used to acquire AFW into a long-term one. After all, K&S has virtually no debt on its books. But no matter, the stock suffered dramatically, crashing from a high of around 45 bucks (split-adjusted) in September to a low in the teens earlier this month.

Fidelity unloaded something on the order of 1.5 million shares of KLIC (approximately 75% of its holding), and Driehaus sold over 1.3 million shares (over half of its KLIC holding). KLIC is still fairly heavily owned by institutions, however, with around 100 institutions collectively controlling three-quarters of the outstanding 19.3 million shares. Insiders own an additional 5%. (As a consequence, the bid/ask spread on KLIC can sometimes be somewhat daunting: 3/4 of a point or even more.)

Somebody seems to like KLIC at current prices, though. Board director James Bagley (yes, the same Bagley who is Vice-chair of Applied Materials) bought 10,000 shares of KLIC in November, and Director Larry Striplin bought 9,000 in late December.

According to First Call, six analysts collectively rate KLIC at 1.8 (between "strong buy" and "buy"). S&P began coverage of KLIC on January 3 with a five-star rating, its highest.

CONCLUSION

Without yet knowing the results of the quarter just ended, I estimate KLIC's current fair value conservatively at $40--or 80% above its current share price ($3.23 X 13). Beyond that, KLIC could move past the $50 mark before the year is out if the story plays out as it reads right now.

Kulicke & Soffa is a "Boring" equipment maker. As Peter Lynch would say, it supplies the shovels and wheelbarrows to all those miners out in Gold Rush territory. It's not all that big, and "1488 Turbo bonder" is not exactly up there with "Pentium" or "Netscape" as household words. And KLIC (the stock) is certainly "Boring" as a stock--as in great value.

KLIC is not, repeat NOT, a stock you can put under your pillow and fall asleep with, however. KLIC has been quite volatile lately: beta estimated from 1.60 to over 2.0, depending on who's doing the estimating. Moreover, I'm putting in a buy the day before the earnings report is released. I've concluded that the risk is worth taking, but KLIC is not necessarily a stock for every taste.

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Texas Industries (NYSE:TXI)
1341 W. Mockingbird Ln, Dallas, TX 19090
Phone: (214) 647-6700
Closing Price, January 26, 1996: $53 (up 1/2)
Trade: Buy 100 shares, January 29, 1996

THE COMPANY

Texas Industries has done an outstanding job the past few years of turning rocks and scrap steel into hard cash. The company's share price grew 68% over the past 12 months and nearly tripled over the past five years, far outpacing its peer group.

The company has two divisions: cement/concrete and steel. The former historically brings in around 35% of total revenues and the majority of profits. The latter consists of TXI's majority stake in Chaparral Steel. The fortunes of both divisions are obviously tied closely to swings in construction activity in Texas and neighboring states. After a period of stagnancy, that activity has picked up noticeably, particularly in commercial construction. TXI also receives a small but growing amount of income from real estate investments.

The cement/concrete division operates primarily in TX and LA, supplying materials such as aggregate, cement, gravel, ready-mix concrete, and sand. TXI's cement plant in Midlothian, TX, is the largest in the state. Below-cost Mexican imports kept cement prices depressed in the company's market area in the 1980s. Tariffs that will remain in force through the turn of the century have corrected that situation, however. Cement prices rose during 1995, and TXI announced a $5 per ton price increase effective January 1 that appears to be sticking, according to the company.

TXI's cement operations are currently running at full capacity, as are most cement production facilities nationally. According to the company, supply and demand are in balance at price levels that provide healthy profit margins. With higher prices and steady demand, the prospects for earnings growth in 1996 are very good.

TXI owns 81% of Chaparral Steel, a minimill that produces construction beams, rebar, and other steel products from scrap steel. Chaparral meets a major portion of its steel requirements from its own shredder operation. The company has two electric-arc furnaces plus a steel rolling operation. Recent capital improvements have made Chaparral a leading producer of large I-beams used in high-rise building construction.

Just under half of Chaparral's products are sold in TX, OK, LA and AR. According to the company, NAFTA "may continue to favorably affect the Company's position as a supplier of certain steel products in the Canadian and Mexican markets."

Chaparral has appeared on Robert Levering's list of "100 Best Companies to Work for in America," owing to the significant attention the company pays to employee education and training. As part of that training, each employee learns all phases of the business, from mill operation to marketing and sales.

During 2Q of FY96, operating profit for Chaparral increased 81% over the year-ago period, to $19.9 million, on sales of $155 million, a 23% increase. The company reported that "the strong market for structural steel beams, Chaparral's primary product line, is continuing into 1996."

THE NUMBERS

Texas Industries made $3.88/share for the FY ending May 1995, up 69% over the preceding year's $2.29. Revenues for FY95 were $716 million, a 15% increase.

The company easily beat Street earnings estimates over the first two quarters of the current FY, and analysts' estimates for FY 1996 (ending May) have risen steadily, to $6.20 currently (range of three analysts is $5.80 to $6.89, according to First Call). Current estimate for 3Q FY96 is $1.38; that earnings report should appear sometime during the week of March 18.

Texas Industries has paid down debt over the past few years. Operations have generated sufficient free cash to enable to company to buy back approximately 10% of its common shares, double its quarterly dividend, and expand its cement/concrete and steel operations through acquisitions and capital improvements.

There are approximately 11.3 million common shares of TXI outstanding. Average daily volume is 30,000 shares. Insiders own approximately 5%. Institutions own approximately 65% (N=105); as of August 1995, Fidelity owned 11.9%, Dietch & Field, 7.4%, and Trimark Investment (Canada), 6.8%.

IBD:  EPS = 75, Rel. Strength = 82

Value Line: Timeliness = 1, Safety = 3

S&P Rating: 4 Stars (Accumulate)

52-week range: Low, 30 1/8 (1/17/95). High, 55 1/4 (11/27/1995)

Trailing P/E: 9.4

Yield: 0.8%

Beta: .61

Key ratios (based on FY1995)

Price/Book : 1.64

Cash flow : $7.83/share

LT Debt/equity : 54%

Return on equity : 13.8%

Current ratio : 2.8

Quick ratio : 1.6

BOTTOM LINE

Texas Industries demonstrated impressive sales and earnings growth throughout 1995, and the company's sound internal operations and a reasonably favorable business environment indicate good potential for continued growth in 1996. The valuation multiple for the stock is not likely to grow much during 1996, so share price appreciation will be driven largely by earnings gains and possible dividend increases. At a multiple of 9.5-times trailing earnings, TXI should cross $60 by mid-year--a 17% increase from its current price level (plus dividend).

-- Greg Markus (MF Boring)