Fab Prospects for Varian Semiconductor Equipment
Paul Price submits:
Varian Semi (VSEA) is a supplier of ion implantation systems to semiconductor manufacturers. They hold the leading market share of the specialized equipment used to form transistors during the semiconductor fabrication process. Major customers include Intel (INTC) and Taiwan Semiconductor (TSM).
Fiscal 2009 (ended Sep. 30, 2009) marked the low point for this cyclical company, although the fourth quarter showed marked improvement with a three-month profit of $0.11 versus a prior year gain of just $0.03 /share.
The December quarter was even better with EPS of $0.22 against a fiscal Q1 2009 loss of $0.10 /share.
While earnings predictability is not high for VSEA, current FY estimates run from $1.38 (Zacks) to (S&P’s) $1.53 /share. FY 2011 expectations run from $2.04 to $2.26. Varian shares sold off by $1.58 today (-5.3%) to close at $28.22. That puts its multiple at under 19x calendar year projections and about 14x next year’s figures.
Here are VSEA’s per share numbers from continuing operations as reported by Value Line:
|
FY
|
Sales
|
C/F
|
EPS
|
Avg. P/E
|
52-wk. Range
|
|
2001
|
8.61
|
1.07
|
0.84
|
16.6x
|
9.30 – 22.20
|
|
2002
|
4.04
|
0.03
|
d.0.17
|
NMF
|
6.10 – 22.60
|
|
2003
|
4.61
|
0.33
|
0.15
|
NMF
|
8.70 – 23.10
|
|
2004
|
6.47
|
0.90
|
0.73
|
23.3x
|
11.40 – 22.70
|
|
2005
|
6.80
|
0.79
|
0.65
|
26.1x
|
13.40 – 20.70
|
|
2006
|
8.77
|
1.17
|
0.98
|
21.1x
|
17.30 – 31.00
|
|
2007
|
13.93
|
2.07
|
1.73
|
21.2x
|
26.40 – 58.20
|
|
2008
|
11.61
|
1.61
|
1.32
|
26.6x
|
14.00 – 41.20
|
|
2009
|
4.95
|
d.0.20
|
d.0.40
|
NMF
|
16.00 – 36.60
|
With an outlook for solid profits as the capital spending cycle ramps up, I see today’s big decline as a good time to start taking a position. VSEA shares were as high as $37.46 as recently as January of this year and changed hands above $40 in both 2006 and 2007. Standard and Poors rates them as 4-Stars (out of 5) and has a 12-month target of $34.
The company is almost debt free and has almost $300 million in cash and securities on their books.
It’s difficult to have a firm upside target but even 19x the low-end estimate for the calendar year would put these shares back above $30 by next January. That’s probably too conservative but it allows me to use put writing as my investment technique, using VSEA as my underlying equity.
Here are some attractively priced puts based on today’s closing prices:
|
Sell
|
Put Premium
|
Break-Even Price
|
Margin of Safety*
|
|
August $25 Puts
|
$1.50 /sh.
|
$23.50
|
16.7%
|
|
Jan. 2011 $22.50 Puts
|
$1.65 /sh.
|
$20.85
|
26.1%
|
|
Jan. 2011 $25 Puts
|
$2.55 /sh.
|
$22.45
|
20.4%
|
|
Jan. 2012 $25 Puts
|
$4.30 /sh.
|
$20.70
|
26.6%
|
|
* Margin of Safety = % break-even price is below today’s close.
|
|||
In each case listed above you can make money if the shares:
- Go up
- Remain unchanged
- Decline by less than 16.7%
On the longer-term puts you are protected against loss as long as VSEA doesn’t drop by more than 20%.
In all cases your maximum upside is the put premium received and your worst case scenario would be having to purchase shares of VSEA at prices 16.7% – 26.6% lower than today’s closing price. At those prices I’d be an outright buyer right now.
Disclosure: Author is short VSEA puts
Investing, Long Term Investment, stock market | admin March 16, 2010
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