Tuesday, April 21, 2009

Tuesday Scattershoot

I was thinking about "the lack of cash issue" today and how it relates to the many hurdles ahead for the semiconductor industry. Getting a bit more specific, I'm thinking about the capital required to develop 450mm and of all things, to fund an industry consolidation.

The 450mm question is easy and was answered several years ago. I say this even though several trade rags and one stock site have have found it necessary to publish comments from a new report saying the equipment industry is wary about 450mm development.

Duh.... Do you hear an echo?

Ron Leckie published a paper about the 450mm R&D spending gap almost four years ago. SEMI's EPWG (Equipment Productivity Working Group) released a paper in June of last year dissing the economics of 450mm - going as far to say:

"....work over the past two years has shown that 450 mm wafer scale-up represents a low-return, high-risk investment opportunity for the entire semiconductor ecosystem; 450mm should, therefore, be an extremely low priority area for industry investment."

They also said, "The equipment industry’s R&D resources have become limited due to slower end-user demand growth, consumer-era economics, and the impact of the 300mm transition."

Isn't it about time we put that one on the back burner? I mean, we're talking about survival right now.

What about that cash?

Unfortunately as this downturn plays out a tsunami of financial trouble is going to hit the industry. For the equipment folks and their supply chain I think we've just seen washout number one. The thing that is really bothersome is that one cannot necessarily attribute this financial trouble to failed investments in next generation tech. It's more a case of financial management. I find it simply mind-boggling to look back at how cash was squandered over the last few years.

The recent bankruptcy at Asyst fits this story along with actions pursued by many others in the semiconductor and semiconductor capital equipment space. Entegris, Electro Scientific and Brooks all spent cash in an effort to appease shareholders. Oops.

Today, cash is king and those without it have hell to pay. A comment from Mike Milken (of all folks) from today's WSJ is very much relevant:

"Without stock buybacks, many such companies would have little debt and would have greater flexibility during this period of increased credit constraints. In other words, their current financial problems are self-imposed. Instead of entering the recession with adequate liquidity and less debt with long maturities, they had the wrong capital structure for the time."

Good ol' Mikey. I was at Merrill Lynch when he held the junk bond world by the short hair. Boy, those were the days. I have to admit, I was chuckling to myself this morning - the world's greatest financial alchemist jumps out of the woodwork to make a perfect call - in hindsight, of course. But hey, that's the way the world turns. We're a society that demands immediate gratification.

This letter that an ex-hedge fund manager jokingly put on his blog a few years ago is precious:

Wednesday, August 08, 2007
The Shareholder Letter You Should, But Won’t, Be Reading Next Spring

Dear Shareholder:
Well, it seemed like a good idea at the time.

I am referring to your board’s decision to approve a massive share buyback and huge special dividend last summer, when the buzzwords going around Wall Street were “returning value to shareholders.”

Why we did it was this: a smart banker from Goldman Lehman Lynch & Sachs came in, all gussied up and looking sharp, and made a terrific PowerPoint presentation to the board with multi-colored slides that showed how paying a special $10 a share dividend, plus buying back a bunch of our stock at the 52-week high, would “return value to our shareholders.”

We should have thrown the fellow out the window, along with his PowerPoint slides, but what happened was, my fellow board members and I were so busy deleting emails from our Blackberries that we just didn’t notice the last slide showing (in very tiny numbers) the “Trump-style” debt we would be incurring to do so.

We also missed the footnote showing the fees that would go to Goldman Lehman Lynch & Sachs for the courtesy of their showing us how to wreck our balance sheet.

Those fees, I am embarrassed to say, amounted to more money than we made the quarter before we “returned value to shareholders.”

But the fact is, we’d been getting so much pressure over the last few years from the hedge fund fellows who own our stock for ten minutes tops, not to mention the so-called “analysts” on Wall Street (around here we call them "Barking Seals"), to do something with the cash...well, the truth is we just couldn’t stand answering our phones any more.

So, in order to finally start getting things done instead of spending all day explaining to these hedge fund fellows and the Barking Seals on Wall Street why we weren’t “returning value to shareholders,” we decided to do the big buyback and the big dividend.

And for a few weeks there, it was pretty nice.

The stock jumped, the phones stopped ringing, and the Barking Seals started congratulating us on the conference calls instead of asking us when we were going to get rid of our cash.

Unfortunately, not only did getting rid of our cash and taking on a huge debt load NOT “return value” to you, our shareholders, it actually crippled the company for years to come.

For starters, as you know, the aftermath of last summer’s sub-prime debt crisis is forcing perfectly fine companies to liquidate businesses at fire-sale prices…but we can’t take advantage of those prices, because we have no cash. And thanks to the debt we incurred “returning value to shareholders,” the banks won’t loan us another dime.

Secondly, as you also know, we’ve had to lay off hundreds of loyal, hard working employees to pay the interest expense and principal on all that debt, because unlike Donald Trump, we actually repay our debts.

Furthermore, as you probably don’t know, we’ve also scaled back some interesting research projects that had great long-term potential for the company, but were deemed too expensive to continue in light of the fact that we have no cash.

Now, I’d feel a heck of a lot worse about all this if we were the only company suckered into buying our stock at a record high price and paying a big fat dividend on top of it.

But I’m happy to report there were others who also did the same stupid thing.

For example, Cracker Barrel, the restaurant chain that depends on people having enough money for gas to get to its stores along Interstates across America, spent 46 bucks a share for 5.4 million shares of its stock early last year to “return value to shareholders.”Cracker Barrel’s stock now trades at $39.

And Scott’s Miracle-Gro, whose business is so seasonal it loses money two quarters out of four, put over a billion dollars of debt on its books with the kind of special dividend and share buyback we did.

Health Management Associates—a healthcare chain that can’t collect money from about a quarter of the patients it handles—paid shareholders ten bucks a share in a special dividend to “return value to shareholders” and then missed its very next earnings report because of all those unpaid bills and all that new interest expense it was paying.

Oh, and Dean Foods, a commodity dairy processor with 2% profit margins, returned all sorts of value to shareholders early last year—almost $2 billion worth—just before its business went to hell in a hand basket when raw milk prices soared.

So, you see, everybody was doing it.

And boy, do I wish we hadn’t.

Barking seals.... Ya gotta love it.....

Mid-day I received a question from an industry associate about this piece:


There are some mixed messages from the Street this morning on Lam Research (LRCX) ahead of the company’s results for its fiscal third quarter ended March, which are due after the close on Wednesday.

* Barclays Capital analyst C.J. Muse cut his rating on the stock to Equal Weight, from Overweight, trimming his price target to $28, from $30. The call is partly based on valuation. But he also notes that losses are likely through 2010, and he writes that “the DRAM semtiment trade with memory making tentative appearance in orders books is now nearly fully discounted,” adding that a sharp uplift in fundamentals is unlikely. He now sees a 2009 loss of $1.02 a share, versus $1 previously; for 2010 he now sees a loss of $1.07, compared to his previous forecast for a loss of 42 cents.
* Stifel Nicolaus analyst Patrick Ho, by contrast, maintains his Buy rating, while upping his target to $34, from $28. His view is that the semi equipment industry over the next few months will “return to some level of normalcy,” though “still in a downturn scenario.”
* Wunderlich Securities analyst Timothy Summers today repeated his Hold rating on the stock, but upped his target to $27, from $20. He writes that “conditions in the semiconductor equipment industry have stabilized and business in the back half of the calendar year will more likely improve than remain flat or decline.”

Here is my response:

If you are asking about the stock I would suggest taking profits here because the valuation is very, very extended. That is the case for most of the semi-related issues.

More likely you are asking about business conditions. I think we limp off the bottom for the rest of the summer. We're probably not going much lower but I seriously doubt if we scream higher. I say that because there is a lot of refurbishing taking place - that along with a ton of stuff sitting on used lots that will be cannibalized before folks start buying brand new stuff in bulk.

Notice how vague the comments are from the two that are bullish. As I have mentioned in some of my notes, it is relatively easy to call a bottom here. The guy from Stifel speaks with forked tongue - the industry will "return to some level of normalcy" but is "still in a downturn scenario". It's as if he is saying, "The normal trend is down but over the next few months the industry will not be going down as fast as it has been over the last nine months. With that in mind we feel as though we should raise our price target."

Ya gotta love it....

Spending on new tools is centered on Intel, Samsung and TSM. A bit will take place at the Foundry Co. but that is going to take a while to get rolling. Earlier today I mailed some friends in the south some comments from the Texas Instruments report that highlight the state of end demand. Let's just say there are question marks on that front. The weakness in end demand has implications for capital equipment sales. It's as plain as the nose on your face.

There's some real action taking place in the refurb/spares and materials supply chain ranks. Attrition and consolidation have the OEMs and the fabs scrambling. I'd love to read an earnings call transcript that contained some biting questions about the health of the supply chain. For example, Lam Research reports tomorrow, what would they say if asked about Air Products leaving the equipment refurb business?


After finishing that note a discussion came up about the health of the supply chain (again). My industry cohorts tell me that there will be a program focused on these supply chain concerns during Semicon West so I thought I would add $0.02 to the jar.

Your mileage will definitely vary with this ramble....

We all have some sort of map in our heads but perhaps putting something in a visible form to clarify who is on and who is off the bubble would be helpful. You know, we're at that point where it is really a case of focusing and supporting the "last man standing". No doubt many will fall off the map this summer. This is particularly true where business is driven by the construction of new fabs. The fall of Asyst is a case in point. Some might disagree but I would even go as far to say that Brooks might be in a similar position very soon.

Now, the *last man standing* theme could encompass several arenas - for one, how about, rather simply, the support and development of semi-mfg and tech development in the US. They are doing it in Europe - with a spokesperson, Malcolm Penn - of all people! And don't forget about the bailouts in Taiwan.

Given the new world order it seems clear that the OEMs must develop a business model that is much more balanced. Although I have not spent time thinking about this recently I've taken the liberty of pasting a small excerpt from a piece published way back in '05. Hopefully it helps describe what I am thinking. Obviously this is dated material and much has changed. The review does bring about a few ideas. Maybe it will do the same for you.

Best Regards (excerpt below),


--- Many firms have turned to services as the key vehicle for growth ---

As customer markets mature, value migrates from the initial purchase of product to services provided later in the lifecycle (e.g., financing, parts, and maintenance). In many industries, (elevators, compressors, aircraft engines, semiconductor equipment), product margins are minimal relative to the potential profits available across the entire lifecycle of product use.

The idea of finding new sources of value is not new. What is new is how information technology is allowing firms to track customers across the use cycle, and in some cases, as in the semiconductor industry, connect with the product in use. Firms such as GE Aircraft Engines dominate their industries using this approach; GEAE is not only after the engine margin but the entire profit of the engine usage cycle (except for fuel). This is possible because GE uses a few dozen sensors in each engine, connected to a satellite to track real time behavior of the fleet. This improved control enables lower cost to GE (through better asset utilization and preventative maintenance) and more importantly, it gives GE the power to price service and parts contracts with much more specificity and longevity. This enables GE to lock up the most important profit pool in the entire engine industry before the competition even gets a bite at the apple.

The most important part of the GE innovation was not the technology, it was the way they created the organizational capacity to analyze the data at their applied statistics lab, and then create management incentives to capture the downstream service revenue – enabling aggressive pricing of engines to capture the service revenue. Despite much rhetoric about being customer focused, most Fortune 500 organizations are “product-based silos” that drive toward market share targets based mainly on product/margin volume. This approach will never realize the full potential of what can be captured by measuring and managing for “share of wallet” – e.g. calculating the entire potential profit across the entire product life cycle and aiming for the sweetest profit pools. When this is done, all the attendant services, parts, etc. become visible as sources of value and growth.


To maximize the complete service relationship, organizations must change their way of thinking from market share to share of wallet. This seemingly simple change is profound and requires a fundamental change in how the company performs market analysis, management control, and information sharing. This shift from share of market to share of wallet also creates a change in the power of the company and its channel partners because he who touches the customer has power.

--- The Otis Example ---

Otis is an example of a company that simultaneously grabbed control of the relationship with the end customer without driving out its channel partners. In the late 1980's a large portion of the services market (where the entire margin is to be found) was controlled by independent service companies (many small) who were often Otis repair personnel who struck out on their own. Then President George David created a centralized call handing and dispatch system called Otisline. By centralizing this dispatch and problem-reporting, Otis was able to capture the customer need, and then direct it into their own service channel, or through the independent service channel. This approach created incremental service for the independent service technicians – and thereby creating support for the system. At the same time the Otisline system gave the manufacturer a closed loop system that allowed Otis management to sort the good service companies from the bad. When desired, Otis could also decide to take the service call themselves.

As the corporation collected the specific service data on each elevator, they acquired better knowledge about the different products that were in service out in the field, and could then arrange to have salespeople approach building owners who had dilapidated elevators, and sell them lucrative replacement elevators.

The next step was for Otis to instrument the elevator itself with a system called Remote Elevator Monitoring (REM). This allowed Otis, like GE, to monitor the fleet of elevators in use. Doing so enabled preventative maintenance, as well as prompt service dispatch with superior knowledge of the correct part and service protocol. Again, the technology was an enabler, but the real change was the management analysis and will to change the culture and the means of measurement. In this way, Otis simultaneously got closer to its customers, controlled more of the service revenue, and built up their channel partners. This model of shared information and monitoring is one that will be copied by many industrial firms who are after share of wallet not just share of market.


That's all for tonight.


Wednesday, April 15, 2009

Top Ten+.... Revisited!


Okay, this is a revisit but because we are in the throes of earnings season some of these thoughts are worth repeating. This particular note was sent in early March and got passed around quite a bit. Eric Savitz called it a "Magnum Opus".


Opened yesterday morning's e-mail with stories from Institutional Investor Magazine and what do you know? Right up front there's an article where JP Morgan semiconductor analyst Chris Danely serves up ten rules for investing in technology/semiconductor stocks: http://www.iimagazine.com/Article.aspx?ArticleID=2117316&LS=EMS251261

Boy, talk about great fodder.

After discussing this list with several investment friends I thought it would be fun to pitch in a few comments along with a few more insights. As you read this please note that the Top Ten Rules from the article are italicized. My comments are in bold letters. Just so you know, no holds were barred in the production of this message.

And here we go:

1. Don’t ever Buy or Sell a tech stock based on valuation. Tech stocks are still largely momentum investments. They go up if the estimates are going to go higher and go down if the estimates are going lower and seem "cheap" prior to a blow up, and "expensive" prior to a run up.

---- Technology stocks, when they fall from favor, trade on valuation. Sadly those valuations tend to be very, very low. With the demise of the hedge funds the above strategy may be mitigated.

2. Exchanging higher revenue growth for lower margins never works. The reason many tech companies have such high multiples is the high margins and high cash flow they generate. When margins go down, multiples go down, ergo, stock goes down.

--- To reiterate; It never works. For most companies lower margins are inevitable as the industry matures.

3. Lead times going out is good. Lead times coming in is bad. These are two occurrences tech companies will deny, deny, and deny ’til the cows come home. They will insist that there is no double ordering when lead times stretch out, even though their customers will openly admit it. They will also try to say their customers will not cancel orders when lead times come in.

--- Agreed, although some interesting balance-of-power issues have surfaced as the food chain has required the semiconductor vendors to hold more inventory.

4. Very rarely is "it’s different this time" a good rationale for investing in tech stocks. I can’t count how many times I’ve heard: "Inventory is better managed" or "Our biggest customer just blew up, but we’re fine." In over a decade of covering tech stocks, VERY RARELY is it different this time. The reason? Human nature is difficult to change.

--- Except it is really different when the world goes into a credit crunch.

5. Technology company management is ALWAYS bullish. Tech company managements are often founders; they work very hard, and have a huge amount of skin in the game. The company is their "baby." Case in point, my mom still loves me after I put her through hell and beyond for the first 25 years of my life.

--- Yes, pathologically so.

6. "Looking through a tough quarter or two" never works. When a tech company blows up, the negative estimate revisions are usually much greater than anticipated.

--- Looking through a tough quarter or two refers to the hopes of the analyst with a buy on a stock that is sinking. It also shines a spotlight on the diminishing propects of a bonus in quarter or two.

7. Intel stock usually follows its gross margins. I have charted this axiom of semi investing back almost 20 years, and it still works.

--- Why? Because with huge capital intensity, small changes in revenues and profits are amplified due to the fixed costs of depreciation and amortization. (Tick-Tock)

8. When a technology company says, "Our revenue growth will come from the Medical or Healthcare end markets," what they’re really trying to say is, "We have no revenue growth." While electronic content is increasing in both applications, the number of units are tiny compared to cell phones or PCs.

--- Yes. The only exception is if they mean they are selling drugs.

9. It's never "just a one-quarter problem." When a tech company blows up sometimes you hear, "its just a one-quarter problem. Business will be back to normal soon." Technology stock corrections are at least two, if not three quarters of sequential declines, even worse when share loss is involved.

--- The one quarter problem is more usually spoken by the analysts and not company management. See #6 as to why.

10. If a tech company either has or supplies into a hot-selling product, consensus estimates are usually way too low. Product cycles never cease to amaze me at how strong they are and how many people will buy the truly revolutionary products such as iPods, cell phones, BlackBerrys and digital TVs.

--- Yes, sort of. Estimates are often too low but beware of customer concentration. When that product comes off its growth trajectory, or the client finds a lesser cost supplier, you will find you need a corollary to further define that ditty.

And just for kicks, here are a few more that could be added to a technology investors toolbox:

11. For an analyst it is normal and expected to be, "Seldom right but never in doubt."

12. When in doubt about issuing a recommendation err on the side of a buy. This is the sell-side credo of professional longevity.

13. In a cyclical industry, it is difficult to be faulted by positing, "It’s never too early to buy."

14. Management can give accurate guidance in an up cycle because the selling funnel is a good leading indicator and production can be efficiently planned for.

15. Management is lousy with guidance in a down cycle; salespersons are optimistic by nature and thus move from excellent to poor indicators without notice. Management, driven by stock options, are loathe to admit a downturn and slow to take corrective action.

16. Management, as a matter of policy, will let the Street tell them it’s a downturn.

17. Charges and write-offs do wonders for future earnings.

18. Stocks seldom recover from the $5/share line-of-death. Those that do make for very rich returns. Gamblers’ dilemma.

19. Watch asset management metrics like inventory, receivables and payables. They give good clues to the ability of management.

20. Few companies can grow at rates above 10% or 15% for very long.

21. Compare cash generation with earnings. Disparities are telltales.

22. Competitors will give you more information about the soft-under belly of subject company than company management.

23. Most analysts have some value, and no analyst has it right all the time. Think, reason, and extract value from those selective strengths.

24. Inside information is illegal. It is also an excellent source.

25. Talk to customers and customers’ customers.

26. Ask the analyst how they derived their estimates. What drives revenues and margins? How does the company outperform GDP?

27. Ask the analyst what they know that the Street doesn’t.

28. Technology M&A is rife with problems. It is almost always bad for the predator and good for the prey.

29. Know what the M&A motivations are. Expanding into new markets can foretell that management is concerned about current market.

30. Technology companies that are doing extraordinarily well are subject to rapid turns in performance. Do not become complacent.

31. The business is about relationships. Smart, informed people are good sources no matter where they are. These people can be surprisingly helpful long after they leave a researched company. And even if they are no longer connected, friends are good for the soul.
I could go on.....

Lucky for you I have to go tap some Maple trees!


P.S. A hybrid of this list was published over on the Barron's Tech Trader Daily blog. Here are the links:



2nd Half Rally?

Over the past few days, right here in the midst of earnings season, I have had considerable discussion with semi industry folks about the bullish forecast from IC Insights - the pent-up demand part. If you have an interest, there's a story over on the EE Times website that talks about the forecast.

I realize inventories need to be rebuilt but the weakened financial state of corporations and consumers will have a significant impact on final demand. I fear, unless there is a "killer app" lurking in the wings, the strength of end demand will not be as healthy as it has been coming out of past down cycles. This is merely a product of the macro-econ equation. Today, the data I see on that front makes a huge recovery very questionable. Believe me, I'd love to say that the "stimulus" is going to work but frankly I don't find precedents that suggest *spending your way out of the downturn* is the approach to pursue. Personally, and I believe I have made this clear in past musings, we are tossing around good money after bad. Until we reign in spending, which also includes the bailout programs, I have my doubts about a sustainable upturn.

Sadly the mathematics of stimulative spending don't work. Sure, the $2 trillion Bill cites in his missive will bring extremely short-lived and fleeting "benefits", if it brings any benefit at all, but when one considers the scope of the current plan(s) our country runs the severe and immediate risk of pushing the "contribution to GDP per dollar of debt" value into negative territory. Call it, "pushing a string" - I'm lacking a more eloquent description but that's what it appears to be.

Here's a fascinating chart that shows the declining impact of Newly Issued Debt on US GDP (sorry for the fuzziness):


Clearly the ratio of Debt to GDP must come down to sustainable levels so that the contribution that debt makes to GDP rises, avoiding the disastrous circumstance where a new dollar of debt creates a negative impact on GDP. This means difficult choices must be faced -- and part of building that foundation must be the clearing of unsustainable debt through default.

At this point this discussion is moot because we are going to try and spend are way out of these problems... And that brings me back to some comments and a question I wrote to a friend about the "stimulus" yesterday. Perhaps someone can answer this: Will there be, or is there already, a public listing anywhere of the science/applications/infrastructure projects, the awards and the amounts earmarked for stimulus spending? And of equal interest, is there a list of those sciences/applications/infrastructure projects that have already been deemed unworthy or outright denied? Speaking from a business strategy perspective it strikes me that a summary like this would be very useful in finding what should and what should not be pursued.

Of course, any info like that would have to be placed in hands that might actually pursue those opportunities. That's another story in and of itself.

Ramble off - at least for now....

Tuesday, April 07, 2009

Wealth Destruction

Was having a discussion with an old friend from Merrill Lynch and he mentioned the awesome "Wealth Destruction.." that has left him feeling numb.

It has really been something hasn't it?    I feel like ranting... Bear with me.

The Government's approach to addressing the root causes of the financial crisis have, thus far, been totally inadequate.  Market realities are slowly forcing us towards obvious prescriptions but acknowledgment and appropriate action is taking place at a glacial pace.  Sadly, I don't think we have the time - or money - to waste.  Issues of politics, perception and partisanship have to give way to pragmatism before it is too late.  If only our legislators could shed the shackles of short term remedies we as a country, and as a people, would be far better off.

I hate being so pessmisstic but like most, I get sick to my stomach when I read/watch the news. Today we see the Financial Accounting Standards Board (FASB) - the supposedly "independent" rule-making body of the accounting profession - and the US Government are in almost perfect sync.  One week the FASB relaxes FAS 157 - the mark-to-market standards applying to financial asset portfolios - while the next brings the Treasury Department's release of bank stress test results.  No doubt the Treasury has tremendous latitude in how it reports the results of the stress tests, and if it chooses it might well incorporate the expected benefits of the "new" FAS 157 on bank capital balances.  This is manipulation at its finest because it would have a PR impact of showing banks as being much healthier than the former accounting regime would indicate.   That regime is the one that forces banks to deal with the reality of where their assets would clear the market.   And while naysayers would have you believe that marking-to-market assets which are intended to be held until maturity is harsh, I'd counter with this simple question:  Does the bank have the term capital, and, therefore, the ability, to fund these assets until maturity?  If the answer is no, which is invariably the case given the massive size of bank illiquid asset portfolios relative to term capital, then marking-to-market is the prudent way to reflect its true financial position.  The US Government is conveniently staying silent on this part of the debate.  But what else should we expect?

Check this table out from a piece in a Goldman Sachs report a few weeks ago (click for larger image):


Doesn't appear that a lot of stuff has been marked down appropriately.   I've got tons of stuff like this on my hard drive - one presentation I was viewing from T2 Partners a week ago chased me off the computer and to the local pub.   (just kidding)

Alas, the business at hand is that of manufacturing outcomes regardless of their basis in reality. Once reality sets in, the reality that deals with market values, financing terms and solvency, the pretty picture that has been painted won't look so good.

But hey, things are OK for now, right? As Vonnegut so often noted, "So it goes."

Impact of Netbooks

Earnings  season.....   Oh Boy!   The deluge is about to begin.

Last week, actually  on April Fool's Day, there was an article in the NYT that talked about the  trends in the portable computing world:   Light and Cheap, Netbooks Are Poised to Reshape PC Industry.  Notable were the comments from Intel's  Sean Maloney:   “When these things are sold, they need clear warnings labels  about what they won’t be able to do,” said Sean M. Maloney, the chief sales and  marketing officer at Intel. “It would be good to wait and play with one of these  products before the industry gets carried away."

Hmm...   They've  really been downplaying this.   Makes you wonder.

In general, it's a timely product for challenging  times.  I believe, and this was noted in the  article, the rise of the netbook will have implications for margins.    I've attached two research reports related to  this for your consideration.   Back in February I made some comments  about the UBS report and sent them out but didn't get much feedback (seems to be a common theme these days) so, for posterity, I'm sending them along with a few minor edits.

My comments follow  the quoted (in blue) excerpts from the UBS report.

Friday, April 03, 2009

No Surprise: MKSI Pre-Announces

Subsystem component supplier MKS (Nasdaq: MKSI) pre-announced earnings for the quarter. No real surprises here. That said, I'll make a few comments.....

Conversations with a few industry friends have mentioned an interesting pattern. Here are some from a veteran of the business:

Smaller equipment orders, stuff at/under $50k, are getting pushed out or cancelled altogether. Visibility, it appears, is still a pipe dream. Many companies are still struggling with how to maximize cash conservation programs. Clearly the objective is to stretch reserves to a point where operations can be funded through CY'10. It is disconcerting to hear Sr. Execs discuss the possibility of this extending more than than 6 quarters into the future. This is a point that is driven home by yet another 20% RIF - a RIF initated by a management team that is held in very high regard.

For the time being it is apparent that the device companies are the only restock plays. While this is a good thing I believe those that are investing at current valuations are being pushed by the action in the market vs. a significant and lasting improvement in fundamentals. Access to reasonable indicators is important. With nice gains in two it is best to be disciplined and committed to move quickly if the market turns. Many analysts, even though they have "BUY" ratings on certain stocks, are very bearish on their conclusions. Much of this hinges around the weak state of end demand.

Good stuff from the insiders. Take it to heart.

Thursday, April 02, 2009

Economic and EPS FYI....

Call this, an economic FYI.....

At the bottom of this message you will find a compilation of comments from a portfolio manager. The comments speak to the disconnects we see in today's economic analysis. Believe me, I have wrestled with this stuff for years - headline interpretation vs. real analysis. You can see the influence of the former with the way the market is jumping around over the past few weeks. And yes, I know that the stock market was ready for a bounce - that happens even in the most bearish environments.

I don't believe we are out of the woods because we still have some real problems with recognition and acknowledgment.

Over the coming days I am going to send some comments on the semi, semi equipment and tech space. Earnings season is approaching and given the strength of the recent rally it is probably best to put out a look at expectations - certainly do not want any surprises. I've been wrestling with the longer term view for many of the semi and semi equipment segments these past few weeks. I realize there is going to be a pop in semi orders and that will drive some equipment business but longer term I get the sense that the business model really needs to change. There have been several articles published about the need for M&A to narrow the capital equipment playing field and while that all sounds wonderful a number of key issues have been glossed over. Why buy when companies are battling atrophy? The company shrink is going to continue for a while and though there are cases where synergies can be immediately realized I think the general thought process is to sit on your hands and wait it out. No one knows where the bottom will be and haphazardly throwing pieces together because you think you can build critical mass is just lunacy. Why reach for critical mass when your customer base is shrinking?

Allow me to reiterate that in most instances the "A" in M&A stands for "Attrition". Management teams have yet to downsize to levels that are close to sustainable. Again, I say this knowing that there will be flurries of order activity - particularly when factor in the very low pace of business over the past six months. There is bound to be a bounce. Thing is, a bounce is about all it will be. What happens after that? The days of companies announcing that they are going to build two, three, four or five fabs are over.

I hope you are all weathering the storm out there. I know it's a battle for everyone. If I can, I'm going to do some traveling during the coming months to survey the landscape. Hopefully if I am in your neck of the woods we can meet face-to-face.

Last but not least, thanks to all that replied to my Roll Call the other day. It's always great to hear from you.

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