Boring Portfolio

Boring Portfolio Report
Thursday, February 29, 1996

by Greg Markus (MF Boring)

The DJIA used this Leap Day to extend its losing string, shedding 146 points for the week so far. Other averages faired poorly, as well. As for the Boring Portfolio, today would have been just peachy had it not been for our pair of tech-ies: Kulicke & Soffa and Lam Research.

As Borefolio followers know, most of the damage inflicted upon its net value is attributable to continuing weakness among semiconductor-related stocks. I purchased KLIC and LRCX at what I considered to be blue-light special prices. Since then, those stocks have become even more deeply discounted. KLIC slipped another 3/8 today, to close at 20 1/4 (bid), and LRCX continued its dramatic slide, falling 2 full points to end the day at 36 3/4.

The other night, I spoke with David Ringler at Lam Research, and I relayed to you (in the Lam Research folder in The Motley Fool) that company's mystification at the weakness of its stock. Business is booming at Lam, and they anticipate their most profitable year ever. Lam beat consensus estimates for their last quarter, and they guided analysts to revise earnings estimates for the remainder of the fiscal year upwards by another 10%. The company remains completely comfortable with those projections.

This morning, I spoke briefly with K&S's Jim Chiafery as he was preparing to address the assembled multitude at the Robertson Stephens conference in San Francisco. I wanted to get his reaction to a cautious comment about K&S that a Smith Barney analyst made yesterday, as well as listen to anything else Chiafery cared to discuss.

You may recall that a couple of weeks ago Smith Barney revised downward fairly dramatically their annual EPS estimate for KLIC, to $3.00. That estimate is well below that of others who follow K&S. Yesterday's word from SB was basically a reiteration of their bearish projection, with a caution that additional downward revisions may be issued if conditions merit, in their judgment.

Chiafery responded that the company remains comfortable with annual EPS estimates around $3.20--which is in line with what CEO Scott Kulicke reported in the conference call following K&S's quarterly earnings report earlier this month. That $3.20 is about a nickel shy of where consensus FY estimates had been pegged prior to that conference call. Most of that nickel is related to the new Flip Chip venture, which was announced yesterday.

As noted in the KLIC folder in The Motley Fool previously, K&S has been projecting sequentially "flat or down revenues" for the current quarter and EPS down perhaps 20% from estimates that were current prior to that conference call. Expenses associated with the upcoming roll-out of next-generation bonders account for the deeper revision in EPS as compared with revenues.

Current guidance from Chiafery on 2Q EPS is for $.68, which would be "merely" a 55% increase over last year's 2Q EPS of $.44. Using $3.20 as an estimate for the current FY would put the company up 44% for the year (as compared with last FY's $2.22).

In addition to those per-share earnings of $3.20, if all goes according to plan the end of 1996 would see K&S poised with a new model wire bonder, a settled-in American Fine Wire operation, and majority ownership of a new flip chip bonding enterprise. To own a share of that action, investors are currently being asked to fork over twenty bucks and change--or approximately 6.5 times the expected $3.20. Seems like an awfully good deal to me.

Yes, but what about all the bad news from chip producers recently? Intel missing earnings expectations, Cirrus Logic crushed, a .93 book-to-bill, Micron's delay at Lehi, LSI's latest news about push-outs ...? Holy looming overcapacity, Batman! Are these reasons for prudence? Absolutely. Are they reasons to sell out of semiconductor infrastructure (as opposed to producer) stocks at the current depressed prices? Negats.

The fundamental force propelling the semiconductor industry is: innovate and expand your productive capacity, or perish at the hands of competitors who surely will. That Darwinian environment puts tremendous stress upon semiconductor producers; it also offers terrific opportunites for the pick and shovel providers like K&S, Lam Research, Applied Materials, and others.

I wouldn't dream of insisting that mine is the only way to interpret the available information relevant to KLIC. After all, The Motley Fool exists as a public space in which *every one of us* has equal opportunity to share information as one discovers it and offer one's own interpretation of that info. In the end, each of us makes his or her own investment decisions. I guess I *am* suggesting to the chartists and momentum-players out there, however, that the Borefolio's investment in KLIC is not without foundation. The same argument applies to LRCX.

Let's close with a quick run-down of today's action in the other Borefolio stocks:

Green Tree Financial was highlighted in a special "Shareholder Scoreboard" section of the Wall Street Journal today. That section listed total returns on stocks of 1,000 corporations for one-, three-, and five-year periods. The Journal notes: "Who would have guessed, five years ago, that a company specializing in financing mobile homes would be in the top 10? ... Green Tree gets an 'A' for all three time periods." GNT closed up 1/4 in celebration.

Rock-solid Texas Industries added 1/2 today, closing at 61 3/4. We're about a week away from TXI's earnings report. In contrast, our fertilizer stock continues to stink up the place, although today's decline was a mere 1/8. I have multiple calls in to the company, but no real response yet from the folks in Saskatoon. I'll keep trying.

Borders Group booked a nice 7/8 gain today, after being added to the Borefolio yesterday. The rise in Borders' stock was probably due to the four books and two CDs I bought there yesterday.

Today's Moves

BGP + 7/8
GNT + 1/4
KLIC - 3/8
POT - 1/8
TXI + 1/2

                   Day   Month    Year  History
        BORING   -0.03%  -1.50%  -1.99%  -1.99%
        S&P 500  -0.67%   0.69%   3.03%   3.03%
        NASDAQ   -0.68%   3.80%   5.68%   5.68%

    Rec'd  #   Security     In At       Now    Change

  1/29/96 100 Texas Indus    54.52     61.75    13.25%
   2/2/96 200 Green Tree     30.39     31.63     4.07%
  2/28/96 200 Borders Gro    22.51     23.00     2.18%
   2/9/96 100 Potash Corp    76.27     74.13    -2.81%
  1/29/96 200 Kulicke & S    23.89     20.25   -15.23%
  2/23/96 100 Lam Researc    48.02     36.75   -23.47%

    Rec'd  #   Security      Cost     Value    Change

  1/29/96 100 Texas Indus  5449.99   6175.00   $725.01
   2/2/96 200 Green Tree   6077.49   6325.00   $247.51
  2/28/96 200 Borders Gro  4502.49   4600.00    $97.51
   2/9/96 100 Potash Corp  7627.49   7412.50  -$214.99
  1/29/96 200 Kulicke & S  4774.99   4050.00  -$724.99
  2/23/96 100 Lam Researc  4802.49   3675.00 -$1127.49

                             CASH  $16765.06
                            TOTAL  $49002.56