Investment Opinion
FOOL PLATE
SPECIAL
Hi-Tech Consolidation
DII GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIIG)") else Response.Write("(NASDAQ: DIIG)") end if %> announced this morning that it will acquire ORBIT SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORRA)") else Response.Write("(NASDAQ: ORRA)") end if %> in a 0.45 to 1.0 stock swap. Orbit rose $1 3/8 to $11 1/2 on the news while DII Group got whacked $2 5/8 to $28 3/8 as a result. At the current quotes, DII Group is buying Orbit Semiconductor for $117.6 million, or 1.9 times Orbit's trailing sales. 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.
Another 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 $1 3/4 to $11 1/4. Zycon anticipates demand returning in the second half due to some decisions by its customers.
These two moves this morning prove that the thing that burned semiconductor and electronics investors are *not* talking about, consolidation, *is* happening and will continue apace given the low valuations many of these companies are garnering on the marketplace. Unlike most professional investors, management in the industry understands the quasi-cyclical nature of the industry and knows that buying counter-cyclically is the way to make money.
A flagging stock price and a low P/E alone, however, does not guarantee an acquirer's interest. Investors were dumping shares of INTEGRATED DEVICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTI)") else Response.Write("(NASDAQ: IDTI)") end if %> this morning, down $57/64 to $11 1/8 after it reported this morning that it will earn between $0.11 EPS to $0.15 EPS next quarter, well below consensus estimates of $0.20 EPS for the semiconductor manufacturer. However, at $11 or so a stub, Integrated Device sells at a 1.25 times sales -- still not necessarily cheap considering DII Group is buying in the 1.9 range. Another example of a stock that is getting pounded but is by no means cheap when you consider the price/sales ratio is automated wafer probe concern ELECTROGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EGLS)") else Response.Write("(NASDAQ: EGLS)") end if %>, getting whacked for $2 1/8 to $16 3/8 this morning as it forecasts 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. APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %>, knocked down to a "buy" from a "strong buy" by Goldman Sachs this morning, also trades at 1.5 times sales -- by no means as low as it can go.
Given that acquisitions are happening in the 1.0 to 1.9 times sales range, investors who want to take advantage of any consolidation in the industry should probably come in below this point. Some examples of semiconductor equipment companies currently in this range are ASYST TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASYT)") else Response.Write("(NASDAQ: ASYT)") end if %> at 0.81 times sales, COHU <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COHU)") else Response.Write("(NASDAQ: COHU)") end if %> at 1.11 times sales and ASECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASEC)") else Response.Write("(NASDAQ: ASEC)") end if %> at 1.11 times sales.
KENTEK INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KNTK)") else Response.Write("(NASDAQ: KNTK)") end if %> surged $1 1/4 to $12 7/8 this morning after a research piece by Randy Befumo (MF Templar) was featured in the Motley Fool's Fool's Gold weekend news and research area over the weekend.
STRUCTURAL DYNAMICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDRC)") else Response.Write("(NASDAQ: SDRC)") end if %> rose $2 3/8 to $27 3/8 after Goldman Sachs added the computer-aided design firm to its recommended list.
CEPHALON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CEPH)") else Response.Write("(NASDAQ: CEPH)") end if %> surged $3 7/8 to $27 this morning after the company received Food & Drug Administration approval for a drug to treat Lou Gehrig's Disease, or ALS. This flies in the face of a prediction by a Goldman Sachs analyst last week that the drug would not win approval due to a high rate of death in Phase II trials.
CHIRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHIR)") else Response.Write("(NASDAQ: CHIR)") end if %>, Cephalon's partner for marketing its Nyotrophin drug, also rose $5 1/4 to $102 1/4 on the surprise acceptance by the Food & Drug Administration.
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 5/8 to $52. With estimates of $2.70 for next year and 22% long term growth, Forstmann looks to be getting Community on the cheap.
PLAYBOY ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLA/A)") else Response.Write("(NYSE: PLA/A)") end if %> surged $1 3/8 to $15 this morning after Barron's spotlighted Mark Boyar, a money manager who recommended the stock. SPIEGEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPGLA)") else Response.Write("(NASDAQ: SPGLA)") end if %> also rose $7/8 to $11 7/8 after a mention in the same spot.
WESTINGHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WX)") else Response.Write("(NYSE: WX)") end if %>, up $1 1/8 to $19 7/8, remains always the trend-follower -- the company decided instead of emulating GENERAL ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> and keeping industrial and television operations together that it might emulate AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and break itself apart into two companies.
A lot of positive momentum for INNOVEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INVX)") else Response.Write("(NASDAQ: INVX)") end if %> -- the stock was up $1 3/8 to $23 3/8 for the third day running after receiving the Comdex "best of show" award for its Internet-based EchoSearch product, in addition to a "buy" recommendation from JW Charles.
PENN TREATY AMERICAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PTAC)") else Response.Write("(NASDAQ: PTAC)") end if %> soared $1 3/4 to $20 1/2 after Bear Stearns initiated coverage on the company with a "buy" rating.
Can't keep a hype stock down. ZOLTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %> rose $5 1/8 to $79 after getting pounded last week when companies recommended by the Cabot Market Letter were crushed when PRESSTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %> ran into some problems.
STERILE CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SYS)") else Response.Write("(NYSE: SYS)") end if %> saw its price deflate $1 7/8 to $19 3/4 in spite of the fact that MAXXIM MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAX)") else Response.Write("(NYSE: MAX)") end if %> came through with a sweetened takeover bid of $20 a share -- still higher than the price at which Sterile Concepts was trading.
Pharmaceutical concern Hoechst Marion and biotechnology firm ALTEON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTN)") else Response.Write("(NASDAQ: ALTN)") end if %> agreed to end their collaboration on Pimagedine, causing Alteon to fall $2 5/8 to $12 7/8 as a result.
Randy Befumo (MF Templar), a
Fool
Selena Maranjian (MF Selena),
another Fool
Transmitted: 06/05/96