It was another earnings blowout day, featuring many blue chips like AT&T, Ford, IBM, Coca-Cola, and Merck. We'll be featuring all of these reports in an Earnings Special Section, and we'll also include NN Ball and Roller and Linear Tech. Tomorrow: Iomega reports!
MF Merlin's Economic News today covers the Census Bureau's March report on housing starts and building permits and a report on the Housing Market Index for April. You'll find the Economic News, as well as all our Special Sections, FoolWires, and Earnings Reports, on the Evening News screen. In tonight's Fool's Gold, MF Templar focuses on semiconductors. Enjoy!
It was another earnings blowout day, featuring many blue chips like AT&T, Ford, IBM, Coca-Cola, and Merck. We'll be featuring all of these reports in an Earnings Special Section, and we'll also include NN Ball and Roller and Linear Tech. Tomorrow: Iomega reports!
MF Merlin's Economic News today covers the Census Bureau's March report on housing starts and building permits and a report on the Housing Market Index for April. You'll find the Economic News, as well as all our Special Sections, FoolWires, and Earnings Reports, on the Evening News screen. In tonight's Fool's Gold, MF Templar focuses on semiconductors. Enjoy!
It was another earnings blowout day, featuring many blue chips like AT&T, Ford, IBM, Coca-Cola, and Merck. We'll be featuring all of these reports in an Earnings Special Section, and we'll also include NN Ball and Roller and Linear Tech. Tomorrow: Iomega reports!
MF Merlin's Economic News today covers the Census Bureau's March report on housing starts and building permits and a report on the Housing Market Index for April. You'll find the Economic News, as well as all our Special Sections, FoolWires, and Earnings Reports, on the Evening News screen. In tonight's Fool's Gold, MF Templar focuses on semiconductors. Enjoy!
FOOL'S GOLD:
Cohu, Inc.: A Lesson in Small-Company Investing
One of the unsung advantages of investing in small companies is the unparalleled access one can have to management. The principle example of this for me over the last 12 months has been Cohu, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COHU)") else Response.Write("(NASDAQ: COHU)") end if %>, a semiconductor equipment company that I have been avidly following for about a year. Cohu reported blockbuster earnings of $0.81 per share today, but slumped $3 1/4 to $22 1/2 when its new president Chuck Schwann talked about the outlook for the semiconductor equipment industry becoming more vague.
Had I owned IBM after yesterday's 10% rout, I would have been one frustrated shareholder. Calls to Investor Relations would have yielded the voicemail box that takes requests for investor kits. A small company like Cohu, though, is a completely different story. Although Cohu did not hold a conference call today after their earnings, I got a chance to talk with someone in the executive suite after earnings were released.
Be warned -- you should probably know a little bit about the company before you try to talk to management. The few times I have called to get information on a small company and unwittingly got connected to management, I have been left frustrated and disappointed that I did not make the most of the opportunity. I normally write a list of questions down on paper before I talk to a company -- even if I do not get to ask them, they help me focus my attention on the pertinent issues.
With Cohu, I got to the chief financial officer (CFO) on the first try and had a nice chat about what was going on with the company. At the time we started talking, the stock was down over $4, getting trashed from the get-go because of their initial statement. John Allen clarified the statement, stating that lead times were shortening and visibility was diminishing. Whereas customers were placing orders 12 to 16 weeks ahead of time last quarter, the company is now getting orders that are being placed only four weeks ahead of time. This makes it very difficult for the company to predict what the orders are going to look like more than one quarter out. When he mentioned "diminished visibility", Allen meant that the future wasn't as clear as it used to be. While the company use to be able to see future revenues and expenses far in the distance, they can now only see short periods clearly.
Because Micron and Motorola jointly account for about 17% of Cohu's business, the push-out (delay) of Micron's Lehi wafer fabrication plant (fab) and Motorola's decision to reduce its capital spending are why Cohu issued this guidance. However, the company is currently carrying $42 million in backlogged orders, which is a little less than a quarter's worth. The implication here is that the second quarter is going to come in at least in the recent $0.80 EPS to $0.90 EPS range, and potentially higher, depending on their capacity.
So now, armed with information about the company from the CFO himself, what conclusions can I draw about Cohu and its future?
The real issue lies in looking forward. Orders are holding up, but with the diminished visibility, there is definitely a more negative tone in the industry. The reaction to the semiconductor book-to-bill ratio's decline by the large semiconductor manufacturers has been as much psychological as fundamental. In their newly-adopted cautionary stance, they are reluctant to commit to equipment purchases before they are absolutely necessary. Cohu agonized over their press release, and it shows in the wording. In the end, stating that it was clear that visibility had diminished and that there was risk was the proper choice and the right thing to do.
With $35 million in cash in the bank, Cohu has sufficient resources to make an acquisition. With the valuations of these publicly-traded companies in the toilet, the next major theme in the industry will be increased consolidation, particularly among the back-end/process and test segments of the industry. Cohu is always evaluating opportunities, but does not see anything attractive yet. However, the three- to five-year theme is clear -- many of the small cap equipment companies are going to get taken out. $35 million, for instance, is only $10 million less than the current market cap of Aseco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASEC)") else Response.Write("(NASDAQ: ASEC)") end if %>, a smaller competitor of Cohu.
With $0.91 EPS in the fourth quarter of 1995, $0.81 EPS in the first quarter of 1996, and about $0.80 EPS of business if they just finish their backlog, Cohu will have $2.70 in earnings per share this year without blinking. A flat or weak fourth quarter would easily vault them into another record year with 10-20% secular EPS growth. Given that the last three downturns in the semiconductor market since 1976 have cleared up after about three to four quarters, Cohu will book a record year and looks to me to have a pretty solid 1997 awaiting it as well, although the year might be end-loaded. In the near term, an acquisition could certainly boost Cohu's net income into stratospheric levels for 1997 as well.
The ability to talk with management at a crucial moment is one of the edges that you gain when investing in a small company. Certainly, the shares are more volatile. However, an informed and intelligent discussion with management where you are dealing with concrete facts and not just getting air blown up your skirt is really a useful thing. This conversation with Cohu and some subsequent thinking about the picture for semiconductor equipment two to three years out has made me decide to keep my shares.
Although Cohu does not have a happy ending today, stories like Iomega or Medicis do. In the end, if investors can know more about a company's prospects than the majority of other players out on the market, they have a tremendous edge. A huge help to gaining an edge like this is a solid relationship with management, as well as a superior knowledge of the consumer market or a professional background in an industry.
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Byline: Randy Befumo (MF Templar)