Westinghouse chairman Michael Jordan must have been reading Fool's Gold this weekend. We wrote about breaking up companies to realize their true value, and today it was announced that Michael Jordan (the chairman of Westinghouse, not the Bull), thinks that Westinghouse needs to be split up into separate industrial and broadcasting units. We'll have a Special Section on this. Today's Lunchtime News features a look at recent consolidation in the semiconductor industry.
MF Merlin's Economic News today covers the Challenger, Gray and Christmas May report on layoffs by U.S. businesses. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar focuses on the price-to-sales ratio. Enjoy!
ORBIT SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORRA)") else Response.Write("(NASDAQ: ORRA)") end if %> shares were in orbit today, rocketing ahead $1 7/8 to $12 after Wall Street learned that the company was being acquired by DII GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIIG)") else Response.Write("(NASDAQ: DIIG)") end if %> in a 0.45 to 1.0 stock swap valued around $118 million, at today's prices. In spite of the fact that DII Group is issuing 3.6 million shares to fund the deal, the company expects that the buyout will be only slightly dilutive to DII's fiscal third quarter and accretive in the fourth quarter and beyond -- after a one-time merger related charge of $3.5 to $4.0 million. The Street wasn't entirely convinced, though, as DII shares slipped $3 1/2 to $27 1/2. Together, the companies will have revenues of over $500 million. With semiconductor issues having fallen so low, many of them now appear attractive as buyouts.
Hospital management concern COMMUNITY HEALTH SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYH)") else Response.Write("(NYSE: CYH)") end if %> is being bought for $52 cash by buyout firm Forstmann Little & Co. this morning, pushing the shares up $8 1/2 to $51 7/8. The buyout price represents roughly a 20% premium over Friday's closing price, and values the deal at nearly $1.4 billion. With estimates of $2.70 for next year and 22% long term growth, Forstmann looks to be getting Community on the cheap. Community Health chairman Richard Ragsdale noted that by agreeing to this buyout, the company avoids a possible hostile takeover.
Storage technology darling IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> zipped $6 to $43 7/8 after the firm announced a deal with a computer company called International Business Machines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> to incorporate high-capacity zip drives in IBM personal computers. Last week Iomega raised $175 million in a stock offering, with the funds expected to help support production. Hambrecht & Quist analyst Todd Bakar probably jazzed investors when he added that, "Demand remains healthy for the product, but they've done a very good job of increasing production over the last six months. The supply/demand imbalances are not as severe as they once were". STORAGE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STK)") else Response.Write("(NYSE: STK)") end if %> reached a similar deal with IBM today for its high-end disk storage subsystems, and its shares jumped $4 1/2 to $39 1/2.
Several stocks benefited from the weekly Barron's Effect today. Discussed in Barron's June 10th issue were PLAYBOY ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLA/A)") else Response.Write("(NYSE: PLA/A)") end if %> and SPIEGEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPGLA)") else Response.Write("(NASDAQ: SPGLA)") end if %>, rising respectively $1 7/8 to $14 3/8 and $1 1/8 to $12 1/8. Barron's feature of money manager Mark Boyar discussing stocks he likes also included tobacco and consumer product manufacturer AMERICAN BRANDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMB)") else Response.Write("(NYSE: AMB)") end if %>, THE NEW YORK TIMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NYTA)") else Response.Write("(NYSE: NYTA)") end if %>, and investment bank SALOMON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SB)") else Response.Write("(NYSE: SB)") end if %>, but these stocks did not move significantly today.
QUICK TAKES: PANDA PROJECT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNDA)") else Response.Write("(NASDAQ: PNDA)") end if %> shares rocketed $3 3/4 to $18 1/2 late this afternoon, after the firm licensed its semiconductor packaging technology VSPA to AMP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMP)") else Response.Write("(NYSE: AMP)") end if %>... KENTEK INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KNTK)") else Response.Write("(NASDAQ: KNTK)") end if %> surged $2 1/8 to $13 3/4. A week ago Janney Montgomery Scott initiated coverage of the stock with a "buy" rating -- you can read more about the printer company in this past weekend's Fool's Gold... Specialty trailer manufacturer FEATHERLITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FTHR)") else Response.Write("(NASDAQ: FTHR)") end if %> rose $19/32 to $6 3/32 after agreeing to buy luxury custom coach-maker Vantare International... REGENCY HEALTH SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHS)") else Response.Write("(NYSE: RHS)") end if %> shot up $1 1/8 to $11 after announcing a $50 million private placement of notes... REPUBLIC ENVIRONMENTAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESI)") else Response.Write("(NASDAQ: RESI)") end if %> continued its recent tear, up $5 1/2 to $30 after announcing a 2-for-1 split Friday... Recent initial public offering (IPO) REGISTRY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: REGI)") else Response.Write("(NASDAQ: REGI)") end if %> surged $5 1/2 to $34 1/2 on no apparent news.
GOATSAnother company taking advantage of the low valuations in the electronics component and capital equipment industry is ZYCON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZCON)") else Response.Write("(NASDAQ: ZCON)") end if %>, purchasing quickturn printed circuit board manufacturing concern Alternate Circuit for $14.1 million. Zycon is paying $8.8 million in cash, $600,000 in stock and assuming the remainder in debt. With Alternate Circuit's revenues for last year at $15 million, this acquisition works out to less than 1.0 times trailing sales -- a steal. At the same time, Zycon talked about slowing industry conditions, saying second quarter net will be flat and shipments will be below both fourth quarter and first quarter results, causing the stock to fall $2 1/4 to $10 3/4. Zycon anticipates demand returning in the second half due to some decisions by its customers.
INTEVAC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IVAC)") else Response.Write("(NASDAQ: IVAC)") end if %>, a maker of sputtering systems (yes, you read that right -- they're related to thin-film disks in computer hard drives) announced today that it acquired privately-held LOTUS TECHNOLOGIES for $8.3 million in cash. It also filed to offer 2.25 million shares in order to fund working capital, general corporate needs, and possible further buyouts. Investors, probably concerned about the value of their shares being diluted, sent shares down $1 3/4 to $18 1/2.
Pharmaceutical concern HOECHST MARION ROUSSEL and biotechnology firm ALTEON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTN)") else Response.Write("(NASDAQ: ALTN)") end if %> agreed to end their collaboration, with Alteon regaining rights to Pimagedine, a drug which treats diabetic nephropathy and which is in Phase III trials. Alteon dropped $2 1/8 to $13 3/8 as a result. Yesterday Alteon announced that it had discovered a new class of drugs which appear to reduce blood glucose levels in diabetic mice. Chairman and Chief Executive Officer James Mauzey stated that preliminary results are "very encouraging".
QUICK CUTS: ELECTROGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EGLS)") else Response.Write("(NASDAQ: EGLS)") end if %>, was shattered $2 3/8 to $16 1/8 this morning as it forecast second quarter earnings $0.10 to $0.13 EPS below estimates on revenues of $47 to $49 million. Electroglas trades at 1.55 sales still -- meaning it ain't bargain basement yet... STERILE CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SYS)") else Response.Write("(NYSE: SYS)") end if %> dropped $1 7/8 to $19 3/4 after agreeing to a $147 million merger with MAXXIM MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAM)") else Response.Write("(NYSE: MAM)") end if %>. Maxxim shares rose $3/4 to $18 5/8... Integrated circuit-maker INTEGRATED DEVICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTI)") else Response.Write("(NASDAQ: IDTI)") end if %> slumped $1 1/64 to $11 after the firm predicted disappointing first quarter earnings... GRAND CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GND)") else Response.Write("(NYSE: GND)") end if %> slipped $2 1/4 to $30, cut from "buy" to "hold" by Montgomery Securities.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
The Care & Feeding of the Price/Sales Ratio
In the LunchTime News's "Fool Plate Special", I talked quite a bit about the price/sales ratio when evaluating which companies in the electronics component and capital equipment universe could conceivably be acquired. I want to spend this article discussing why the price/sales ratio is such a handy-dandy tool for evaluating when a company is *really* cheap. I'll also make an argument for why investing counter-cyclically in quasi-cyclical industries is the only way to make real money and use real-world examples to figure what potential acquisition values might be.
*THE PRICE/SALES RATIO*
I wrote a long piece on the price/sales ratio (PSR) in a recent series of articles entitled "Valuation: Principles & Practice" that appeared three weeks ago in Fool's Gold, our Weekend News & Research area. The price/sales ratio was really popularized in recent times by Ken Fisher, son of famous '30s and '40s investor Phil Fisher and quite an investor in his own right. In his 1984 Dow Jones-Irwin book "Super Stocks", Ken Fisher waxes poetic at length as to why he believes the price/sales ratio is a superior way to find value stocks.
1) THE PSR PLACES A VALUE ON A COMPANY WHETHER IT IS MAKING MONEY OR NOT. This is an important point, as a large part of the investment community is so earnings-centric that if a company temporarily has no earnings, they have no reasonable way to value it. Of course a company must again make money to ultimately be profitable, but if a company has hit a short term snag (like a cyclical downturn) the PSR represents a great way of comparing companies in a quantitative, apples-to-apples way.
2) THE PSR ULTIMATELY IS LINKED TO THE P/E RATIO VIA MARGINS. The PSR is not simply a number independent of the most common valuation tool, the P/E ratio -- it is intimately connected. If a company has a PSR of 1.0 and 5% profit margins, then it has a P/E ratio 20. (Think about it. If a company is worth $100 million and has a PSR of 1.0, then it has $100 million in revenues. If margins are 5%, then it made $5 million. $100 million in market cap divided by $5 million in earnings is 20.) Thus, if you can make an assumption about margins and know the PSR, you can predict a future P/E.
3) THE PSR IS WHAT MANY COMPANIES USE TO EVALUATE POSSIBLE ACQUISITIONS. Ultimately, when it comes to valuation, you are in a "when in Rome" kind of situation. Most technology firms look at multiples to sales as well as discounted cash flows and multiples to free cash flows. So, looking at electronic components and capital equipment companies with this metric makes a heck of a lot of sense.
*COUNTER-CYCLICAL*
The electronics component and capital equipment industry is where the semiconductor and semiconductor equipment manufacturers ultimately belong. Rather than some magical province of technology that never goes down, these companies are all linked by the common thread of the worldwide business cycle and the demand it places on "technology"-related electronics components and capital equipment.
Like any other cyclical industry, there is an ebb and flow to the business. When business is good, it is very, very good. When business gets slow because demand clicks down, the manufacturers get too much inventory or some combination of the two -- look out below. The electronics components guys see the rate of orders click down, get nervous, and cut back on their purchases of capital equipment. This wonderful merry-go round has happened at least five times in the past twenty years in the electronics component and capital equipment industry, with the most recent time being now.
Anyone who had the misfortune to buy near a top often suffered anywhere from a 25% to 80% loss, depending on how well they originally bought, from a top to the next bottom. Sequentially, however, the next top was about 30% or so higher than the previous one over a period of about 4 years. For instance, if you bought at the top in April of 1979 when orders were $463 and waited until April of 1982 when orders were $595 million, you would have seen 28% total growth over three years, or about 8% average annual growth. If you had bought at the September 1980 low, you would have seen 71% to the April 1982 high, or a 24% annualized growth rate. If the semiconductor equipment book-to-bill looks similar at all, the only way to make any darn money in the stocks would actually appear to be investing *counter-cyclically*, when everyone else is nursing their wounds from the last pullback from the top.
*REAL-WORLD EXAMPLES*
All of this musing was sparked off by this morning's acquisition of ORBIT SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORRA)") else Response.Write("(NASDAQ: ORRA)") end if %> at a 1.9 multiple to sales by DII GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIIG)") else Response.Write("(NASDAQ: DIIG)") end if %> and the acquisition of privately-held Alternate Circuit by ZYCON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZCON)") else Response.Write("(NASDAQ: ZCON)") end if %> at a 1.0 multiple to sales. Assuming that the private, smaller company in printed circuit boards deserved a slightly lower multiple, then you have the take-over value of 1.1 to 1.9 times sales for many of these companies. This implies that below a PSR of 0.85 or so would give you nice upside while limiting your downside somewhat. (I would also ensure that I had a cushion of working capital equal to about 50% of the market capitalization under me if I was really paranoid.)
Looking a handful of 20-some semiconductor and semiconductor equipment companies chosen randomly by this deadline-crazed writer, there is really still mixed value in the semiconductor universe from a price/sales point of view. The cheapest of the bunch is NATIONAL SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %>, with a PSR of 0.73. Others below the 0.85 range include TEXAS INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> and LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %>. Fairly valued in the above-0.85-but-below-1.9 band include AMD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %>, TERADYNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %>, INTEGRATED DEVICE TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTI)") else Response.Write("(NASDAQ: IDTI)") end if %>, APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMAT)") else Response.Write("(NYSE: AMAT)") end if %>, S3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SIII)") else Response.Write("(NASDAQ: SIII)") end if %>, MICRON TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> and NOVELLUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NVLS)") else Response.Write("(NASDAQ: NVLS)") end if %>. In the above-3.0-and-heading-toward-the-moon camp we have INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %>, ALTERA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTR)") else Response.Write("(NASDAQ: ALTR)") end if %>, XILINX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XLNX)") else Response.Write("(NASDAQ: XLNX)") end if %>, SIERRA SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SIER)") else Response.Write("(NASDAQ: SIER)") end if %> and, at a whopping 6.6 times sales, LINEAR TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LLTC)") else Response.Write("(NASDAQ: LLTC)") end if %>. To round out the list, I mentioned ASYST TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASYT)") else Response.Write("(NASDAQ: ASYT)") end if %> as cheap and COHU <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COHU)") else Response.Write("(NASDAQ: COHU)") end if %> and ASECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASEC)") else Response.Write("(NASDAQ: ASEC)") end if %> as close to cheap this morning.
Of everything named, most of the small fry still appear to be radically overvalued. By the screen defined above, Asyst Technology is the clear winner with 48% of its market capitalization in working capital. Lam is number two with 42% of its market cap securely in working capital, with National Semiconductor at 33% and Texas Instruments at 25% (a not insignificant $2.5 billion). I guess the real test of the logic here is to revisit the group in a year and see how well these companies has performed relative to the overall market and specifically to the group of 20-some stocks I assembled.