Thanks to recent troubles, I knewshares of
Axcelis Technologies (Nasdaq:
were cheap. But I had no idea how cheap. When
Applied Materials (Nasdaq:
announced plans to buy a rival, an apples-to-apples comparison
revealed a massive gap in how investors are assessing these firms.
After a closer look, I'm betting Axcelis could double or even
triple with just a few breaks.
a big fan of Applied Materials
, as I've noted before. The chip equipment maker has such a broad
array of products that it routinely snares some of the best
contracts in the business. Applied Materials' move this week to
Varian Semiconductor (Nasdaq:
for a hefty $4.9 billion looks like a wise move. Not just because
it's added a $1 billion revenue stream to itsincome statement , but
also because the company can now offer customers an even broader
range of chip equipment in just one place. That makes life even
more difficult for rivals such as
Novellus Systems (Nasdaq:
A leader acquires a leader
Varian is also a leader in its field. The company's machines are
used to stimulate ions in an electric field, a key process in the
building of semiconductors out of large wafers. To gain access to
Varian's technology and customer base, Applied Materials is paying
a hefty five times trailing sales. To justify that price, Applied
Materials notes Varian is in the midst of a heavy growth spurt --
sales are expected to rise roughly 50% this year. Varian's gross
margins -- in the 50%-range -- are also quite impressive.
Axcelis is a distant No. 2 in this field. But the company also has
strong technology and a solid customer base. Yet
trade for just a fraction of their potential worth -- at least in
relation to what Applied Materials is paying for Varian Semi.
Shares trade for just 0.6 times trailing sales on an
basis. A lower multiple than Varian is warranted, especially in
light of the company's weaker gross margins, but the
gap (shown in the table above) can largely be explained away by a
lower level of absorbed
. Rising sales should push gross margins back into the low
40%-range in a year or two, as was the case in the middle of the
Wheels in motion
has kicked off a game of musical chairs. As we've often seen in the
world of high-tech, once a specific niche technology provider is
acquired, a frenzy ofconsolidation begins where all other players
are snapped up. Said another way, if Applied Materials will now
have a strong grip on the ion implantation market, rivals like
Novellus and KLA-Tencor need to have a similar offering to retain
or lure customers.
Axcelis surely is no gem. The company's stock has fallen from the
$6-8 range during the last upswing of the semiconductor equipment
cycle and now trade for just $2 (even after a 13% spike on
Wednesday, May 4). Axcelis released weak fourth quarter results in
early February, causing shares to drop 23% in just one day.
Fourth-quarter sales were up more than 100% from the year-ago
period, but they still lagged forecasts by more than 10%. The
subsequent selloff led a group of seven insiders to purchase a
collective 144,000 shares at an average price of around $2.60. The
insiders were premature with their bullishness: shares slid well
lower in subsequent weeks.
First quarter sales of $93 million were flat sequentially but were
below forecasts again. Yet even if the company can simply maintain
that quarterly sales pace, annual revenue should still be up more
than 30% from a year ago. That spike is coming from a pair of
freshly-introduced product lines that hit the market in late
Action to Take -->
Shares of Axcleis trade for around 12 times projected 2012 profits.
If the company is acquired, a buyer could lop off a good chunk of
overhead, pushing profitability even higher. While Applied
Materials paid nearly five times trailing sales for Varian,
Axcelis, with its laggingmarket share and still subpar gross
margins, could fetch at least two times trailing sales in a
. This means shares have anywhere from 150-250% upside from here.
That recent spate of insider buying may turn to be a wise move
after all. Insiders likely know that Axcelis can boost sales on its
own -- a clear panacea for the lagging stock price -- or the
company can shop itself to the highest bidder. Look for speculation
to build in coming weeks and months.
-- David Sterman
P.S. -- Few investors realize that a 20-year energy agreement
between the United States and Russia is about to expire. This deal
supplies 10% of America's electricity. As broke as our government
is, the situation is so serious that President Obama is asking for
$36 billion to avert this crisis. And Republicans support him.
Here's what's going on…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.