Wednesday, February 7, 1996
MARKET CLOSE
INDEX:
I. Market News: A Mixed Bag as Techs Falter
II. Heroes: Cardinal Health, Pyxis, Texas Pacific Land Trust, Manpower, Crown Vantage, Logan's Roadhouse, Sofamor-Danek, ProCyte, Three Five Systems, Groupe Videotron.
III. Goats: Emisphere, Vishay Intertechnology, Maxis, TRO Learning, GT Interactive, Broderbund, Integrated Health Services, Creative Computers, Brooktree, Platinum Software.
IV. Investment Perspective: The Party's Over for the Chip Equipment Stocks
MARKET CLOSE
DJIA: 5492.12 +32.51 (+0.60%) -- RECORD
S&P 500: 649.92 +3.59 (+0.55%) -- RECORD
NASDAQ: 1084.76 -4.32 (-0.40%)
MARKET NEWS
Just when you thought it was safe to buy a "tech" stock. Pow! Biff! Bam! More downgrades on tech shares. Did we say tech? We meant "computer cluster," a more accurate although less melodious moniker for the companies that Wall Street likes to call technology stocks. Anyway, the NASDAQ failed to make a record today, the first time in four days, while solid-performance from blue-chip Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:S)") else Response.Write("(NYSE:S)") end if %> powered the Dow Jones Industrials up to a new record. Check the special Sears Earnings area on the main Motley Fool screen for details on the retailer that everyone used to love to hate but now loves to love. MF Templar looks closer at the rocky performance of the semiconductor equipment stocks in today's Investment Perspective, so if the precipitous drop in Applied Materials has you in a dander, skip down to there immediately.
HEROES
Cardinal Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CAH)") else Response.Write("(NYSE:CAH)") end if %> announced today that it would merge with Pyxis Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PYXS)") else Response.Write("(NASDAQ:PYXS)") end if %> and allow Pyxis to operate as a "wholly owned subsidiary." Pyxis shares were up 6 3/8 to 22 1/8 on the news that they would be exchanged for 0.4066 shares of Cardinal Health common. Cardinal, which is issuing 15.5 million shares to fund the transaction, fell 2 1/2 to 56 7/8 on news that it was paying $920 million for the health care information management concern. News on January 31st that Pyxis anticipated profit growth this year of 20% probably played a part in Cardinal's decision. The fragmented healthcare information market boasts over 450 separate companies vying for the multi-billion dollar market. Acquisitions of the stronger members by health care companies looking to diversify make some sense given the synergies. The Fool newsroom is expecting more acquisitions of smaller players by the big names in healthcare information like HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HBOC)") else Response.Write("(NASDAQ:HBOC)") end if %>.
Texas Pacific Land Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TPL)") else Response.Write("(NYSE:TPL)") end if %> got missed by a dart today, sending the shares up 6 1/2 to 32 3/8. The stock was chosen by an investment professional in the most recent installment of the Wall Street Journal's "Investment Dartboard" contest, where four market mavens each pick a stock to compete with four chosen randomly by the Journal's editor. The case for Texas Pacific was particularly compelling, as the money manager likened holding three shares of the stock to owning 1.1 acres of their vast land holdings. The company has grazing leases on 99% of its land and generates royalty income from 2,800 oil and gas wells located on its holdings. The company is the result of Texas & Pacific Railway's 1888 bankruptcy and does not get a lot of intention from investors. Buying Cirrus Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CRUS)") else Response.Write("(NASDAQ:CRUS)") end if %>, shorting Drexler Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DRXR)") else Response.Write("(NASDAQ:DRXR)") end if %> and buying Potash Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:POT)") else Response.Write("(NYSE:POT)") end if %> were the other suggestions.
A motley crew of companies made or beat their earnings estimates today, sparking rallies in their shares. Temporary services giant Manpower <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MAN)") else Response.Write("(NYSE:MAN)") end if %> beat estimates by 12.5%, causing the shares to spring up 2 1/2 to 29 5/8. Specialty paper manufacturer Crown Vantage <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CVAN)") else Response.Write("(NASDAQ:CVAN)") end if %> defied bad weather and industry softness to make 17% more than the Street anticipated, smashing estimates into pulp and causing its shares to rally 2 1/8 to 17 3/8. Logan's Roadhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RDHS)") else Response.Write("(NASDAQ:RDHS)") end if %> was up 2 to 21 1/4 on news that the recent IPO made its $0.19 earnings per share consensus, up 73% from the year-ago period. Spine-implant maker Sofamor-Danek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SDG)") else Response.Write("(NYSE:SDG)") end if %> surged 1 7/8 to 29 on news that it made its $0.38 earnings consensus estimates.
ProCyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PRCY)") else Response.Write("(NASDAQ:PRCY)") end if %> surged mid-day after word got out that it would be allowed to market its Iamin gel wound dressing. ProCyte, which rose 1 31/32 to 5, has been trying to get this clearance for a number of years. The hydrogel product will be used to dress diabetic ulcers, pressure sores, first and second degree burns as well as surgical incisions, if ProCyte's press release can be believed. The hydrogel industry is $300 million per year, and any valuations of ProCyte incorporate assumptions about how much of this market it can take. Three Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TFS)") else Response.Write("(NYSE:TFS)") end if %> also climbed 2 to 19 5/8 today on news of a new product---although as far from wound dressing as salad dressing. Three Five got a big order for its cellular phone LCD displays.
Groupe Videotron Ltee is looking at selling off its 56% holding in Videotron Holdings plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VRONY)") else Response.Write("(NASDAQ:VRONY)") end if %> for $20 to $22 a share. This was big news for Videotron, which traded for only $14 3/4 when the market opened this morning. The Canadian cable concern rose 3 3/8 to 17 on the news. Videotron has been under pressure over the last year as uncertainty about regulation in Canada scared investors away. Bell Cablemedia plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BCMPY)") else Response.Write("(NASDAQ:BCMPY)") end if %> owns 26% of Videotron as well, meaning that investors only have about 18% of the total shares outstanding to trade.
GOATS
You could have had the shares for $5.00 back in mid-December. They hit $11 7/8 yesterday in heavy volume. The latest hot semiconductor stock? The newest thing in networking? Nope. Try oral drug delivery systems. Emisphere Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EMIS)") else Response.Write("(NASDAQ:EMIS)") end if %>, off 1 3/8 to 10 1/2 on no news today, is looking into ways to make drugs that are only effective by injection work orally, or "PO" as the MDs like to say. The company has the singular distinction of losing more money that it did the previous year for four years running, paying its bills by issuing more shares. They have a few high-profile "joint ventures" going with the likes of Elan and Schering Plough, but none of this has worked down to the bottom line. But here's the good news---they are supposed to lose *less* money next year and even *less* the year after. Profitable by 2000? Don't hold your breath.
Despite its ultra-cool name, Vishay Intertechnology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VSH)") else Response.Write("(NYSE:VSH)") end if %> was down today on less than cool earnings, losing 3 to 26 1/2 at the close. Investors were looking for earnings of $0.48 per share and Vishay only could deliver $0.40---a 20% disappointment, although 25% higher than it did the year earlier. News that low-cost producer Vishay was looking to ship 3,800 jobs overseas might have clued many on the Street into the fact that cost control was just not happening with the current set-up. Vishay is the largest US and European manufacturer (although not for long) of fixed resistors, resistive sensors, and tantalum capacitors---in other words, commodity electronics components.
Spillover from yesterday's edu-tainment software disaster, featuring Broderbund, haunted the Street today. Once hot recent initial public offering Maxis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MXIS)") else Response.Write("(NASDAQ:MXIS)") end if %> was down 2 to 20 1/4 in brisk volume as investors sought to take profits from what now is perceived as a sagging sector. TRO Learning <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TUTR)") else Response.Write("(NASDAQ:TUTR)") end if %>, which managed to avoid getting hacheted yesterday, could not avoid the ax today, losing 1 to close at 14. GT Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GTIS)") else Response.Write("(NASDAQ:GTIS)") end if %>, the maker of Doom, managed to buck the trend, up 2 to 11 1/4, suggesting that edu-tainment software just might not be what America's children want---they want to kill aliens. The culprit behind all of these problems, Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %> continued to fall today, down 1 41/64 to 44 23/64. If this keeps up, some of these cash-strong, no-debt, strong brand name companies might start to look interesting.
Integrated Health Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IHS)") else Response.Write("(NASDAQ:IHS)") end if %> got hosed today when it announced that it would not make its earnings numbers for the quarter. Down 2 3/8 to 22 1/8, Integrated terminated one agreement because it was not producing enough cash and cut off a recent acquisition because the prior owner had cooked the books, resulting in a one time hit to earnings. Check the Neocontrarian folder in the Fool's School for details there. Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MALL)") else Response.Write("(NASDAQ:MALL)") end if %>, which makes the MacMall and PC Mall mail order catalogs, made Integrated look like an angel when the company reported that its operating chief Sam Khulusi resigned after it missed estimates by 25%. MALL was down 1 7/8 to 8.
On the brokerage rating front, Robertson Stephens kicked retailer Brooktree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BTRE)") else Response.Write("(NASDAQ:BTRE)") end if %> in the teeth today when it cut the shares from market perform from long-term attractive. That's bad, since just about anything can be listed as long-term attractive if you make the long-term long enough. Brooktree was off 1 7/8 to 9 3/4 on the news. Platinum Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSQL)") else Response.Write("(NASDAQ:PSQL)") end if %> plummeted 1 1/4 to 3 1/2 after some analysts downgraded it. The reason? The company will cut 15% of its workforce next quarter and take a large charge to do it, after losing $0.82 per share on a $0.22 per share charge this quarter. Pretty ugly.
INVESTMENT PERSPECTIVE: The Party's Over for the Chip Equipment Stocks
I. Background
A two-week long rally that had moved semiconductor equipment shares ahead 30-50% ended today to the disappointment of many Foolish investors. Silicon Valley-based Montgomery Securities and Hambrecht & Quist (H&Q) both came out with high profile downgrades---downgrades that the Street paid a heck of a lot of attention to, given their proximity to Chip-Center, USA.
Semiconductor equipment is a specific kind of capital equipment used to manufacture semiconductor chips---those little bits of silicon that keep popping up in your radio, your automobile and, most of all, your computer. Semiconductor equipment is normally broken into three categories: front-end (wafer fabrication), back-end (package assembly), and final test. Front-end equipment prepares the wafer for micro circuitry, back-end equipment makes the actual chip, and test equipment checks it all out to see if it works properly. A fourth quasi-category of automation has become hip in the past few years, as well. The semiconductor equipment industry is 2.5 times larger than the "classic" capital equipment industry, according to figures available at Infrastructure (http://www.infras.com). This means that 2.5 times as many bonders, CVD and etch machines are sold as those used to make everyday stuff like cars, airplanes and industrial machinery.
So if semiconductor capital equipment is such a big industry, who could not like it? A heck of a lot of people, it seems. The last high-profile downgrades of semiconductor equipment industry came from Rick Whittington of SoundView Financial and Thomas Kurlak of Merrill Lynch---two industry bigwigs who called the chips right all the way up last year. The stocks got crushed after these downgrades but had recovered somewhat in the past two weeks. And just like the flu you thought you beat in December but which came back to haunt you today, the downgrades came again---this time from young guns at Montgomery and H&Q, two of the hottest young brokerages going.
II. Entrails Exposed---The Downgrades and the Reasons Why
This is how the downgrades stacked up today:
Company Ticker Downgraded Downgraded Downgradedby from to
Applied Materials AMAT H&Q/Mont. Buy Hold
Lam Research LRCX H&Q/Mont. Buy Hold
KLA Instruments KLAC H&Q/Mont. Buy Hold
Silicon Valley G. SVGI H&Q Buy Hold
Opal Technology OPAL H&Q Buy Hold
PRI Automation PRIA H&Q Strong Buy Buy
Novellus Systems NVLS H&Q Strong Buy Buy
Gasonics GSNX H&Q Hold (reiteration)
Mattson Tech. MTSN H&Q Hold (reiteration)
Integrated Pro. IPEC H&Q Buy (reiteration)
Novellus Systems NVLS Mont. Buy Hold
Tencor Instr. TNCR Mont. Buy Hold
Gasonics GSNX Mont. Buy Hold
Ontrak Systems ONTK Mont. Buy Hold
Genus GGNS Mont. Buy Hold
H&Q analyst Mark Fitzgerald was brief in his reasoning, stating that he cut his ratings because of a concern about declining DRAM chip prices and the defensive posture that Intel was taking after major inventory problems in its fourth quarter. Montgomery Securities analyst Brett Hodess was more loquacious when talking to the press about why he thought that the game was up for the equipment stocks. In his analysis, Hodess had found that each company he cut was "heavily DRAM dependent", with "limited upside potential and heightened uncertainty" as a result. With the prices of 4-meg and 16-meg DRAM still declining rapidly, according to his industry intelligence, the DRAM companies will not be pulling in the huge amount of cash they did last year to fund plant expansion and concomitant equipment expenditures.
The "speculative" expansion currently underway in the Southeast could be halted completely if the DRAM market goes sour, Hodess wrote, and besides, the stocks are up 30% in the past month anyway. Hodess was somewhat positive on companies with "leading edge" technologies, those of 0.35 micron or below, and believes that "growth drivers" for these companies will remain in place. "Cost cutting and global infrastructure have increased as a competitive weapon," he concluded.
III. The Contrary Case
To begin with, although memory plants do make up a large part of the total semiconductor capital equipment expenditure, lower prices in DRAM do not dowse demand across the board for every company above. In fact, some of these companies do more business with the logic side of the business, a fact Hodess brushes over completely and Fitzgerald gives a nod to with his mention of Intel.
Secondly, increased price competition increases the need for greater throughput and yield. Throughput is a fancy industry term for efficiency, and is a measure of how many chips can be processed in a fixed amount of time. Automated processing equipment is used to increase throughput, decreasing costs by removing the time factor from the manufacturing process. Yield is a term that describes how many chips can be garnered from one wafer of silicon. Increased yields means lower costs and fewer reject chips to get tossed out by the testers.
The market for automation equipment remains intact whether DRAM goes down to $5 or back up to $15, because as long as these companies have any chance at all of making money they will want to enhance that greatly. For processes that focus on higher end chips, like Chemical-Mechanical Polishing/CMP (Applied and Integrated Process), the comings and goings of DRAM pricing don't matter at all.
A third important point is that many of the new DRAM fabs that have been announced by the big companies---we are talking Samsung, NEC, Toshiba, Texas Instruments, Motorola and IBM here---are not even for the 4-meg and 16-meg DRAM under heavy fire. These plants are being built to manufacturer 64-meg and 256-meg DRAMs---the DRAMs of the future. Since the companies involved are huge international conglomerates looking five years into the future without any serious cash flow problems, I doubt that a change in 4-meg and 16-meg DRAM pricing will matter a whit to them.
IV. Some Other Voices Chime In
To put it all in the words of Infrastructure's Carl Johnson, "This whole analysis is flawed from the very start. It's as though Micron and Intel set the tone for everybody." Carl Johnson runs the Infrastructure Web Site (www.infras.com) with Ron Leckie, and both bring to the table significant 20+ years of experience in the semiconductor equipment industry. When asked how dependent manufacturers like Applied Materials are on orders from the likes of Samsung, NEC, Toshiba, and Texas Instruments, Johnson quipped "they are dependent to a great degree but how can you be right on your studies when you don't understand what products are going to come out of these fabs?"
I got the opportunity to speak to Rick Whittington of SoundView Financial as well today, to get his input on the cuts by Fitzgerald and Hodess. "I would say [they are] warranted," Whittington stated. "I've been shaking my head at the rally. [Fitzgerald and Hodess] held through the down draft and took advantage of the recent rally to cut their ratings." According to Whittington, for the first time in years the semiconductor manufacturers are not surprising themselves, while their factories are still firing at a "full-tilt boogie." The 64-meg and 256-meg plants will initially be ramped up with the glutted 16-meg DRAM, which might cause the manufacturers to slow the capital spending freight train.
So who is right here? The companies will inevitably tell the tale, but they are all saying different things. The chip companies ordering the equipment are split, with Micron Tech and Intel definitely slowing down, Samsung pushing orders out but not cutting its plan, and Texas Instruments denying there is any slowdown in capital spending at all. The semiconductor equipment manufacturers report robust business for the next two quarters out, past which their radar gets cloudy. Whether or not the annuity-like streams of income from maintenance---increasingly important in sophisticated semiconductor equipment---and the drive to optimize production will keep earnings growth solid as some semiconductor manufacturers fade is something that no one knows for sure, but everyone has opinions on. In the end, the individual investor needs to look at the facts, make a long term decision, and move on, letting the Street to worry about what will happen next quarter.
Byline: Randy Befumo (MF Templar)