It's time for the Book-to-Bill ratio again! That's right -- although Fools don't put much credence in it, many investors follow this semiconductor industry number very closely. Assuming the number is released when promised -- it has often been delayed in the past -- we'll have a Special Section on the number and on what it really means.
MF Merlin's Economic News discusses the implications of today's May report on the producer price indices for finished and intermediate goods. 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 contract manufacturing. Enjoy!
RES-CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RSCR)") else Response.Write("(NASDAQ: RSCR)") end if %> announced today that it had initiated a new juvenile services program, spurring the shares on to a $2 3/4 to $23 gain today. The 24-hour residential treatment center will include an on-site school and will house 30 boys ranging in age from 10 to 14. Youth services are a hot little subsector of the privately-managed facilities industry, with rocket stock YOUTH SERVICES INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YSII)") else Response.Write("(NASDAQ: YSII)") end if %> having torn up the charts for months. Basically, people are buying these as CORRECTIONS CORP. OF AMERICA'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CXC)") else Response.Write("(NYSE: CXC)") end if %> for kids, assuming that government will continue to fund private residential care facilities for at-risk children in spite of the raft of cutbacks in other areas.
STORAGE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STK)") else Response.Write("(NYSE: STK)") end if %> continued to be a spot of strength in an otherwise weak market for storage technology stocks, up $3 3/8 to $42 7/8 today. Lehman Brothers made positive comments on the company as a result of the pact with Dow component IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> announced yesterday. Storage Tech will provide the storage subsystems it currently markets under the Iceberg, Kodiak and Arctic Fox names to IBM customers. Otherwise, the storage industry was a mess: QUANTUM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QTNM)") else Response.Write("(NASDAQ: QTNM)") end if %> down $2 3/8 to $19 1/4, WDC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> losing $1 7/8 to $23 and IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> off $2 1/8 to $41 3/4. Quantum suffered at the hands of downgrading analysts with WDC losing in sympathy, while Iomega dropped in "profit-taking" after it became clear the Zip would be an option on the Aptivas.
Investors took the fact that a large shareholder of MG PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MGPR)") else Response.Write("(NASDAQ: MGPR)") end if %> decided to increase ownership to about 51% of the company as a good sign today, bidding the shares up $1 1/4 to $3 7/8. The light fixture concern will issue new shares, partially for cash and partially to extinguish $1.7 million in debt. Overall, though, issuing new shares dilutes the value of the current stakeholder claims. The large shareholder, who is quite possibly getting shares in the company below the current market price, is probably not losing sleep over this dilution. However, new investors definitely should keep their wits about them.
QUICK TAKES: Possibly the best-named analyst on the planet, DLJ's Jack Blackstock, upped his numbers for U.S. INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USI)") else Response.Write("(NYSE: USI)") end if %>, causing shares to rally $1 1/4 to $24... REPUBLIC ENVIRONMENTAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESI)") else Response.Write("(NASDAQ: RESI)") end if %> continued to surge, $5 3/4 to $35 3/4, showing Wayne Huizenga's golden touch has yet to lose its potency... NAVARRE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NAVR)") else Response.Write("(NASDAQ: NAVR)") end if %>, the would-be Internet radio king that currently makes its living as a CD-distributor, rose $3 1/4 to $22 1/2 today... SIGMATRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SGMA)") else Response.Write("(NASDAQ: SGMA)") end if %> rose $2 1/8 to $14 1/8 after being profiled in Investor's Business Daily's New America puff piece page... WESTELL TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> rose $6 1/4 to $45 for no good reason we could find... LECROY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LCRY)") else Response.Write("(NASDAQ: LCRY)") end if %> was up $2 1/2 to $21 1/2 on a brokerage house upgrade... PLAYERS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PLAY)") else Response.Write("(NASDAQ: PLAY)") end if %> rose $1 1/8 to $11 due to better-than-expected May revenues from its Louisiana casino.
SYNALLOY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYNC)") else Response.Write("(NASDAQ: SYNC)") end if %> announced last night that second quarter earnings would not meet analyst expectations, and dropped $1 53/64 to $17 59/64 today; the specialty chemical and metal concern did not see the normal seasonal demand in textile dye, and also pointed to pricing pressures. The company stressed that it felt these conditions are temporary, and that it hopes to see improvement in the third quarter. A new 16-inch continuous pipe mill will also start kicking revenues in that quarter.
Video software and hardware developer NUMBER NINE VISUAL TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NINE)") else Response.Write("(NASDAQ: NINE)") end if %> was slapped with a class action suit by its shareholders today. Shares slumped $1 3/8 to $9 3/4 as investors complained that the company misled them by misrepresenting or omitting material information about its products, sales and earnings in connection with its initial public offering (IPO) a year ago. Of interest is the fact that nearly half of Number Nine's revenues come from one customer -- DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>. New Fools should note that this isn't a terrific situation, when a company is too reliant on one customer.
TOWER SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TSEMF)") else Response.Write("(NASDAQ: TSEMF)") end if %> got hosed today after the Israeli semiconductor manufacturer announced the end of a wafer purchase pact with HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>. The stock plummeted $3 1/8 to $10 7/8, and was also downgraded by Bear Stearns analyst Andrew Neff from "buy" to "neutral". Israeli-based computer consulting and development firm DATA SYSTEMS & SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSSI)") else Response.Write("(NASDAQ: DSSI)") end if %> also dropped, down $1 1/4 to $6 3/4, because it owns 25% of Tower.
QUICK CUTS: STRUCTURAL DYNAMICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDRC)") else Response.Write("(NASDAQ: SDRC)") end if %> succumbed to profit-taking today, dropping $2 5/8 to $23 3/8 after being upgraded by Goldman yesterday... AMC ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AEN)") else Response.Write("(AMEX: AEN)") end if %>, a Kansas City movie distributor, was downgraded by Goldman Sachs from "recommended list-buy" to "moderate outperform" due to its "surprisingly weak" first quarter. Shares fell $4 1/8 to $29... Sunglass company DE RIGO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DER)") else Response.Write("(NYSE: DER)") end if %> didn't enjoy a day in the sun today, with shares dropping $4 7/8 to $22 3/4. The company said it knew of no reason for the drop... BELL SPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BSPT)") else Response.Write("(NASDAQ: BSPT)") end if %> warned of disappointing fourth quarter results and sank $3/4 to $8 1/8... Customer service must not count for much -- after being named by VLSI Research in the top ten suppliers of semiconductor wafer processing equipment, TEGAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TGAL)") else Response.Write("(NASDAQ: TGAL)") end if %> slipped $1 to $7... Iomega-related companies had a bad day today. Supplier HMT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMTT)") else Response.Write("(NASDAQ: HMTT)") end if %> slipped $2 1/2 to $19, while IMP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMPX)") else Response.Write("(NASDAQ: IMPX)") end if %> fell $3/4 to $12 1/4 and SMARTFLEX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SFLX)") else Response.Write("(NASDAQ: SFLX)") end if %> slumped $1/4 to $17.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Semiconductor revenues showed some signs of stabilization with the release of the May book-to-bill ratio this afternoon. The May book-to-bill, according to the Semiconductor Industry Association (SIA), clocked in at 0.84, with the April number getting revised up to 0.81 from 0.78. The May result and the April revision make the last few months look as follows:
December -- 1.12
January -- 0.92
February -- 0.89
March -- 0.80
April -- 0.81
May -- 0.84
My guess is that many are going to suggest tomorrow that the sequence suggests March is the low and that prices are firming up at substantially-reduced levels. The inhuman three-year price strength in semiconductor chips has evaporated in under six months. In the face of decent economic growth, corporate upgrades to Windows95 and Windows NT, and lower prices spurring demand, you should expect some positive comments about the sector -- particularly given that empty-headed estimates called for 0.78 in May.
But will this be right?
Prices for commodity memory and logic chips have plunged as much as 80% to 90% over the past six months. SRAM that cost $20 in the fourth quarter trade hands for a mere $5 now; DRAM that went for has high as $34 can be had for only $7 today. Although prices have slowed their descent, no one is yet talking about any kind of price hikes. The consensus between the industry and analysts is pretty firm here -- prices are probably going to stay put at current levels for quite some time, considering the competitive landscape.
Given the fact that this rapid descent only began in the fourth quarter of 1995 and was still ongoing throughout the first quarter of 1996, most semiconductor manufacturers have yet to post a full quarter with chip prices completely at current levels. The problem with this is the comparisons to a year ago that most investors routinely make. If you are a semiconductor manufacturer and prices have fallen 50%, to do more in revenues last year than this year you have to double unit volume -- a pretty tall order for many companies. This is particularly true with the comparisons to the second quarter and third quarter of 1995 that are upcoming, two quarters where many semiconductor manufacturers blew out the doors.
Drew Peck of Cowen & Co. has said a number of times in the past few weeks that the semiconductor area hits its cycle lows three to six months after the lowest book-to-bill has been recorded. In my opinion this is true because of the comparison problem I outlined -- the price drop has been short and swift and many semiconductor manufacturers will show year over year decreases in profits and revenues for the next few months. Are they going to lose money? If they are involved in commodity chips where the price has dropped below their cost to manufacture the darn thing, yes.
For investors who were not so destroyed by the semiconductor group in the fourth quarter of 1995, things are starting to look pretty interesting. There are many semiconductor manufacturers selling at price/sales ratios far below 1.0 with relatively solid cash and working capital positions. As mentioned in today's Lunchtime News, I have been working up a list of these for the past few days, with some pretty interesting results. First and foremost, despite the fact that the chip stocks have cratered, many are still not very attractive to value investors. Even at $33, well off of its high of $42, for instance, DSP Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSPC)") else Response.Write("(NASDAQ: DSPC)") end if %> still has a price/sales ratio in excess of 12.5 and a P/E in the high 50s. Considering that you can buy Texas Instruments, another leader in the digital signal processing (DSP) field, at a PSR of 0.75 and 10 times earnings, DSP Technology still seems out of whack with the group.
Although I am still plugging through the semiconductor manufacturers, one group that surprisingly popped up when I was doing my low-PSR work on the electronics components industry are the contract manufacturers. These are the guys who put together circuit boards and stuff for original equipment manufacturers. For instance, Hewlett-Packard has SCI SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCIS)") else Response.Write("(NASDAQ: SCIS)") end if %> put together the complete circuit boards for the DeskJets and LaserJets, before slapping together the printers themselves.
Four of the largest contract manufacturers are JABIL CIRCUITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %>, SCI Systems, SOLECTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SLR)") else Response.Write("(NASDAQ: SLR)") end if %> and ZYCON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZCON)") else Response.Write("(NASDAQ: ZCON)") end if %>. Although near-term valuations are a little fuzzy, the simple fact is that more and more original equipment manufacturers are outsourcing the circuit boards as a way to control costs. Each of the companies is growing in the 20% to 25% range over the next five years, according to the analysts. Finally, each of them trades with a PSR of 0.79 or lower -- worth a look, in this Fool's book.