Industry Background of People on This Forum

[infinitee00]

@infinite: thoughts on the moat of FLIR systems?

 

I did some research on FLIR a couple of years back, so my information might be dated. I really like FLIR and our testing team actually uses their thermal imaging cameras in our lab. It is a fantastic company with a really good historical GMs, OMs, CFs. solid balance sheet and have grown considerably in the last decade - both organically and through some good acquisitions. However, I wouldn't invest in them now as I feel they are fully valued at this point.

 

FLIR and Fluke ( now a subsidiary of Danaher) are pretty much a duopoly in the thermal imaging market with FLIR controlling ~60% of the market. As far as I remember, they were very well diversified with revenues split between commercial, consumer and defense and almost 50-50 split between US and International. I don't know if that has changed since then. They have been trying to vertically integrate themselves for the last few years. Mgmt has claimed that this will make them more competitive but I am always skeptical when a tech company presents cost advantage as a competitive advantage. That may very well be true but I am not so sure at this point.

 

When I think of a moat, I think - can a company with significant resources and engineering muscle crash their party? My answer is  - Yes, but not likely. FLIR might have significant IP in this domain but still nothing insurmountable for a big company like , say, Samsung or Toshiba.  The switching costs are not significant for the commercial customers, although might be true in the defense/law enforcement market. I think the reason the big kahunas have stayed away from this party is because the market is sort of a niche and the market size may not be as big or attractive enough for them to invest in R&D, sales/marketing and distribution. The cost of FLIR's products are a miniscule portion of any company's R&D budget so managers and executives are not going to worry about a few thousand dollars as long as the performance is satisfactory. Also for startups, it will be difficult to enter this market as they would have to produce something that is probably 2/3 generations ahead at a lower price to convince FLIR's present customers to switch. So the source of their advantage for now maybe that they are biggest fish in a small pond and will probably be for some time. In fact, this small market size may be one of the reasons they have been diversifying from their core business ( moving into consumer and marine markets) and has been acquiring aggressively in the last few years.

 

The only thing I don't like about FLIR is their capital allocation. I hate it when executives abuse buybacks and buyback high priced stock to keep share count same due to dilution from options exercise. From 2003-2012, FLIR spent ~$600M on buybacks, yet their diluted share count has pretty much remained the same. This is not something I like to see, although I would say that their management has been pretty good otherwise.

 

Hope this helps.

 

 

 

[investor-man]

I'm going to nominate this one for best post of 2014 thus far! I'm curious, infinitee00 - what's in your portfolio?

 

Since many here have provided some insight into their industry, here's a few unsolicited comments/advice and biased observations from a semiconductor industry non-expert ( an industry analyst may be able to provide much more insight than us engineers)

 

> The semiconductor industry is very broad and finding experts who understand the entire industry is almost impossible (sometimes even finding experts in each segment is difficult). Moreover, the industry dynamics change very fast and the industry as a whole is quite volatile. I would be careful about listening to any industry insider who claims to be an expert on the industry and even more careful in using their advice as a basis for my investment decisions. Working in an industry doesn't make us experts. In my experience, sometimes a vast majority of employees are clueless about their own company's strategy or financial condition, leave alone the entire industry.

 

> There was a McKinsey study I read some years back that claimed that in the last 15-20 years, the semiconductor industry as a whole ( excluding Intel) has been a money losing industry. If I remember the report correctly, it mentioned that Intel has created more value than the entire semiconductor industry combined. I cannot vouch for the reliability of that study but just from being an insider, I can say that sounds about right. 'Promising' companies that raise millions from venture capitalists but then fail to make any money for shareholders are a dime a dozen in the semiconductor industry ( true for most of tech sector I guess). For every Intel, Qualcomm, Analog devices, Texas Instruments, Micron there are hundreds that folded or sold out at a loss. The thing to remember here is - be extra cautious when you invest in this industry.

 

> The cost of building a fab and researching/modelling new processes has grown significantly with each new process generation ( almost 2X for every halving of process nodes i.e say going from 65nm to 32 nm). In the future, very few companies will be able to build or invest in new fabs as processes shrink, since they will need a certain amount of revenue and profitability to justify such an expense ( I have seen estimates that the cost of building a fab for a 300mm/22 nm process can cost upwards of $7Billion and needs sustainable revenues of ~$10 billion to operate the fab. There aren't many companies in the semiconductor industry that generate that kind of revenues). There maybe only 4-5 companies in the world that can build and operate a fab beyond 22nm as the revenues won't be sufficient to sustain such an investment. (other than dedicated foundries, I don't know any company other than Intel, that generate revenues to build and run a 14nm fab ).

 

This maybe seen as a moat for those companies, although that doesn't mean companies that work on older process nodes cannot compete, but it's an uphill battle. This also means that dedicated foundries/fabs like TSMC and Globalfoundries can have huge advantage and pricing power in years to come. If that happens and more and more companies continue to move to the fabless model, there might be capacity and time to market issues in the future. Unless the industry moves to a different type of basic device, material or process engineering altogether, it's difficult to see how smaller companies can compete effectively with the giants as we move to smaller process nodes. Looking at the flip side of the coin, one can see that if and when the industry moves to some other type of material or basic device ( e.g FinFETs, although who knows) , companies that have invested heavily in the previous gen fab will be left with billions of losses and will either have to retool their fabs at considerable expense or close them down. Some of those companies may not survive.

 

> R&D expenses as a % of revenue has been high throughout the history of the semiconductor industry. It is not uncommon for semiconductor companies to spend 12-15% of their revenues ( or higher) on R&D. R&D spending as % of revenues has actually been going up in the industry. This makes it even more difficult for smaller companies to compete directly with the large players. Since R&D expenses are always made with the goal of generating future revenues, one way I measure the effectiveness of R&D spending for a company is by looking at next few years of revenue as a multiple of R&D spend and looking at the long term trend.

 

e.g If a company spent $100M on R&D in 2010,  and earned 1B, 1.2B and 1.4B in 2011, 2012 and 2013 respectively. I would often calculate the effectiveness of their R&D by dividing the revenues from 2011, 2012 and 2013 by R&D expenses from 2010 ( in this case the multiples will be 10,12 and 14) and continue doing it on a rolling basis. One can possibly also calculate the 2 year and 3 year averages of this ratio. This is probably not a very scientific method to measure effectiveness of R&D, but I use it to get a trend and compare across different competitors.

 

> Like any tech company, the best resource of any semiconductor company are it's leadership team and engineering talent. Salaries are sometimes the highest cost in a tech/semiconductor company. Unfortunately, there isn't a good or objective way to directly measure engineering talent and the return on that investment. I tend to use # of patents, design wins/employee ( if available), revenue/patent and patents/employee as rough proxies to gauge the engineering talent of a company. This method is somewhat flawed as # of patents don't tell you the quality or revenue generating ability of the patents, but in the absence of a good metric, this is a useful workaround.

 

> In spite of the maturity of the industry- semiconductor industry is still growing rapidly ( projected anywhere between 8-15% annually for the next decade). Till about the 2000s, the Americas, Europe, Japan and Asia-Pac ( ex japan) were close to each other in terms of revenues. Since the 2000s however, semiconductor industry revenues in Asia-Pac have grown exponentially. Today Asia-Pac contributes close to about half the total worldwide revenues and almost 3 times more revenue than the Americas or Europe. However, the high growth has also been accompanied by high volatility, which is not a bad thing though as it allows knowledgeable investors to invest during those temporary downswings.

 

> A consequence of maturity of any industry however, is that the industry is no longer fragmented. There are very few segments and sub-segments within the industry ( processor, memory, wireless, power, test equipment,materials. and even EDA or manufacturing equipment) that have more than 2-3 players who control the bulk of the market i.e 60-80% of revenues go to the top 2/3 players. If you can find a #4 or #5 player in any segment of the semiconductor industry that is consistently profitable, chances are high that they would be acquired in the next few years. Maybe other industry insiders can point me to any segment they know that is still fragmented so that we can look at those opportunities.

 

> As someone mentioned in this thread, patents are over-rated and most do not make money by themselves. Probably 10% ( or even less) of patents generate 90% of the royalty/licensing fees. However most companies continue to pursue expanding their IP "Portfolios" aggressively. There is also a perverse incentive for senior engineers to file as many patents as possible, since promotions and bonuses are based on no. of patents filed - not the quality of patents or revenue generated from patents ( although some companies may be trying to change this culture).

 

> Like other high tech industries - Operating margins, Cash flows and ROICs are very important metrics. Although stability in this industry may be fleeting,  relatively stable companies with good competitive advantages will have GMs > 50%, Operating margins > 15%  and high ROIC numbers over an entire business cycle ( e.g Texas Instruments, Altera, Analog Devices etc). In spite of this, investing in the semiconductor industry has it's pitfalls as it's often difficult to see the danger lurking around the corner and one needs to know where the puck is going ( information about those are not always as readily available). The best companies tend to lessen this risk by constantly shedding low margin businesses/ products and buying or investing in high margin businesses/products that can grow at a decent pace and also by trying to maintain leadership in a few segments of the industry ( e.g a company that is # 3 or #4 in 5 different areas will not last very long in this industry).

 

That's all I could think of right now - not exhaustive by any means. I am sure others will have different and valuable perspective on the industry and can fill in for anything that I have missed.

 

Before you take the above info seriously, just remember that we engineers can dish out intelligent sounding BS very confidently, so - verify, verify, verify !!  ;)

[sys]

wildlife biologist.  there seem to be few of my ilk around here.

 

i'd be worried that my profession might be predictive of my investing success, but i'm only here to copy from investors more rigorous and cautious than myself, so perhaps i should be relieved rather than worried.

[dpetrescu]

Infinite,

Do you have any thoughts why IMOS is valued so low (related to type of work they do and outlook/risks in their industry)? In General why others in this sector have low valuations?

 

IMOS had an EV/EBITDA of less than 2 (not a typo) and a decent/low PE and very low debt. There are other companies in this sector with EV/EBITDA of 3, 5, 6. IMOS is the largest independent provider of testing and assembly services for flat panel display and memory semiconductors. The do a lot of work for Micron. As of Right before the new year it is about 7% of my portfolio.

 

Thanks,

Daniel

[xtreeq]

Really nice to see people's backgrounds! My educational background is law, military history and business ... and I have passed the first 2 levels of the CFA exams  ;D

 

I've been a criminal prosecutor, a tax lawyer for one of the Big 4, a consultant at M/B/B and for the past few years I have owned a small business that caters to hospitals and retirement homes and done some real estate projects. I cannot say I have any profound knowledge of a particular industry, but I try to learn as much as I can about how things work.

[zippy1]

I am surprised and happy to see so many boardmembers here are in the semiconductor industry.

 

I, myself, am a so called "device" manager for a major semiconductor foundry. The last assignment that I had is to develop their 28HP and 28HPM devices. I led about 25 device engineers to built the transistors for these technologies and interlocked with customers to make sure they could use these transistors successfully. 

 

Like infinitee00 said, semiconductor industry is a very large and diverse industry. Somehow, I have never felt comfortable investing in any companies in this industry as I am acutely aware of how ignorant I am about the business side of things.

 

On the other hand, my job also essentially precludes me from investing in semiconductor companies. 

[BG2008]

I'm going to nominate this one for best post of 2014 thus far! I'm curious, infinitee00 - what's in your portfolio?

 

Since many here have provided some insight into their industry, here's a few unsolicited comments/advice and biased observations from a semiconductor industry non-expert ( an industry analyst may be able to provide much more insight than us engineers)

 

> The semiconductor industry is very broad and finding experts who understand the entire industry is almost impossible (sometimes even finding experts in each segment is difficult). Moreover, the industry dynamics change very fast and the industry as a whole is quite volatile. I would be careful about listening to any industry insider who claims to be an expert on the industry and even more careful in using their advice as a basis for my investment decisions. Working in an industry doesn't make us experts. In my experience, sometimes a vast majority of employees are clueless about their own company's strategy or financial condition, leave alone the entire industry.

 

> There was a McKinsey study I read some years back that claimed that in the last 15-20 years, the semiconductor industry as a whole ( excluding Intel) has been a money losing industry. If I remember the report correctly, it mentioned that Intel has created more value than the entire semiconductor industry combined. I cannot vouch for the reliability of that study but just from being an insider, I can say that sounds about right. 'Promising' companies that raise millions from venture capitalists but then fail to make any money for shareholders are a dime a dozen in the semiconductor industry ( true for most of tech sector I guess). For every Intel, Qualcomm, Analog devices, Texas Instruments, Micron there are hundreds that folded or sold out at a loss. The thing to remember here is - be extra cautious when you invest in this industry.

 

> The cost of building a fab and researching/modelling new processes has grown significantly with each new process generation ( almost 2X for every halving of process nodes i.e say going from 65nm to 32 nm). In the future, very few companies will be able to build or invest in new fabs as processes shrink, since they will need a certain amount of revenue and profitability to justify such an expense ( I have seen estimates that the cost of building a fab for a 300mm/22 nm process can cost upwards of $7Billion and needs sustainable revenues of ~$10 billion to operate the fab. There aren't many companies in the semiconductor industry that generate that kind of revenues). There maybe only 4-5 companies in the world that can build and operate a fab beyond 22nm as the revenues won't be sufficient to sustain such an investment. (other than dedicated foundries, I don't know any company other than Intel, that generate revenues to build and run a 14nm fab ).

 

This maybe seen as a moat for those companies, although that doesn't mean companies that work on older process nodes cannot compete, but it's an uphill battle. This also means that dedicated foundries/fabs like TSMC and Globalfoundries can have huge advantage and pricing power in years to come. If that happens and more and more companies continue to move to the fabless model, there might be capacity and time to market issues in the future. Unless the industry moves to a different type of basic device, material or process engineering altogether, it's difficult to see how smaller companies can compete effectively with the giants as we move to smaller process nodes. Looking at the flip side of the coin, one can see that if and when the industry moves to some other type of material or basic device ( e.g FinFETs, although who knows) , companies that have invested heavily in the previous gen fab will be left with billions of losses and will either have to retool their fabs at considerable expense or close them down. Some of those companies may not survive.

 

> R&D expenses as a % of revenue has been high throughout the history of the semiconductor industry. It is not uncommon for semiconductor companies to spend 12-15% of their revenues ( or higher) on R&D. R&D spending as % of revenues has actually been going up in the industry. This makes it even more difficult for smaller companies to compete directly with the large players. Since R&D expenses are always made with the goal of generating future revenues, one way I measure the effectiveness of R&D spending for a company is by looking at next few years of revenue as a multiple of R&D spend and looking at the long term trend.

 

e.g If a company spent $100M on R&D in 2010,  and earned 1B, 1.2B and 1.4B in 2011, 2012 and 2013 respectively. I would often calculate the effectiveness of their R&D by dividing the revenues from 2011, 2012 and 2013 by R&D expenses from 2010 ( in this case the multiples will be 10,12 and 14) and continue doing it on a rolling basis. One can possibly also calculate the 2 year and 3 year averages of this ratio. This is probably not a very scientific method to measure effectiveness of R&D, but I use it to get a trend and compare across different competitors.

 

> Like any tech company, the best resource of any semiconductor company are it's leadership team and engineering talent. Salaries are sometimes the highest cost in a tech/semiconductor company. Unfortunately, there isn't a good or objective way to directly measure engineering talent and the return on that investment. I tend to use # of patents, design wins/employee ( if available), revenue/patent and patents/employee as rough proxies to gauge the engineering talent of a company. This method is somewhat flawed as # of patents don't tell you the quality or revenue generating ability of the patents, but in the absence of a good metric, this is a useful workaround.

 

> In spite of the maturity of the industry- semiconductor industry is still growing rapidly ( projected anywhere between 8-15% annually for the next decade). Till about the 2000s, the Americas, Europe, Japan and Asia-Pac ( ex japan) were close to each other in terms of revenues. Since the 2000s however, semiconductor industry revenues in Asia-Pac have grown exponentially. Today Asia-Pac contributes close to about half the total worldwide revenues and almost 3 times more revenue than the Americas or Europe. However, the high growth has also been accompanied by high volatility, which is not a bad thing though as it allows knowledgeable investors to invest during those temporary downswings.

 

> A consequence of maturity of any industry however, is that the industry is no longer fragmented. There are very few segments and sub-segments within the industry ( processor, memory, wireless, power, test equipment,materials. and even EDA or manufacturing equipment) that have more than 2-3 players who control the bulk of the market i.e 60-80% of revenues go to the top 2/3 players. If you can find a #4 or #5 player in any segment of the semiconductor industry that is consistently profitable, chances are high that they would be acquired in the next few years. Maybe other industry insiders can point me to any segment they know that is still fragmented so that we can look at those opportunities.

 

> As someone mentioned in this thread, patents are over-rated and most do not make money by themselves. Probably 10% ( or even less) of patents generate 90% of the royalty/licensing fees. However most companies continue to pursue expanding their IP "Portfolios" aggressively. There is also a perverse incentive for senior engineers to file as many patents as possible, since promotions and bonuses are based on no. of patents filed - not the quality of patents or revenue generated from patents ( although some companies may be trying to change this culture).

 

> Like other high tech industries - Operating margins, Cash flows and ROICs are very important metrics. Although stability in this industry may be fleeting,  relatively stable companies with good competitive advantages will have GMs > 50%, Operating margins > 15%  and high ROIC numbers over an entire business cycle ( e.g Texas Instruments, Altera, Analog Devices etc). In spite of this, investing in the semiconductor industry has it's pitfalls as it's often difficult to see the danger lurking around the corner and one needs to know where the puck is going ( information about those are not always as readily available). The best companies tend to lessen this risk by constantly shedding low margin businesses/ products and buying or investing in high margin businesses/products that can grow at a decent pace and also by trying to maintain leadership in a few segments of the industry ( e.g a company that is # 3 or #4 in 5 different areas will not last very long in this industry).

 

That's all I could think of right now - not exhaustive by any means. I am sure others will have different and valuable perspective on the industry and can fill in for anything that I have missed.

 

Before you take the above info seriously, just remember that we engineers can dish out intelligent sounding BS very confidently, so - verify, verify, verify !!  ;)

 

I second this opinion

[yadayada]

@infinite, thx for the analysis. What if Flir was trading at 12-13 PE levels tho? It looked interesting to me at those prices because it seems infrared will be going into the main stream with prices coming down so much. There are alot of practical uses for cheap infrared, and they seem positioned to profit from that a couple of years down the line.

 

It seems one advantage is cost because of scale right? If they manage to increase their market share above 60%, shouldn't that give them some kind of cost/quality advantage? Even when chips are no longer being improved much technically. Which seems to also be part of their edge.

 

And interesting about the buybacks, You would say that the CEO would be aligned, owning about 70 million$ worth of stock.

[no_free_lunch]

I'm in IT, generally more on the business side of things.

 

Thinking about it from the perspective of my background, it has been awhile since I've been able to apply that industry experience to a stock selection.

[infinitee00]

I'm going to nominate this one for best post of 2014 thus far! I'm curious, infinitee00 - what's in your portfolio?

 

 

Thank you for your kind words ! The only semiconductor company I have in my portfolio right now is MRVL.

[Rainforesthiker]

Patent law  - 25 years; mostly in the computer, software, and communications areas; education - electrical engineering.

[mikazo]

I'm a software developer.

[Packer16]

Any particular reason you like Marvell versus other chip makes like Interdigtal that may be cheaper?  I also always wondered why Cirrus Logic trades a discount to other chip makers that have similar margins?  TIA.

 

Packer

[infinitee00]

Infinite,

Do you have any thoughts why IMOS is valued so low (related to type of work they do and outlook/risks in their industry)? In General why others in this sector have low valuations?

 

IMOS had an EV/EBITDA of less than 2 (not a typo) and a decent/low PE and very low debt. There are other companies in this sector with EV/EBITDA of 3, 5, 6. IMOS is the largest independent provider of testing and assembly services for flat panel display and memory semiconductors. The do a lot of work for Micron. As of Right before the new year it is about 7% of my portfolio.

 

Thanks,

Daniel

 

I have not looked at IMOS lately, so your research may be years ahead of mine. I remember looking at IMOS a while back, along with ASX and AMKR but decided to pass. At the time,  the CEO or chairman was being investigated for misappropriating funds and the company had a convoluted holding structure ( red flags for me). Moreover their historical FCFs looked poor and debt levels looked high. So wasn't very keen on spending more time researching the company.

 

However I looked at it very briefly after your post and liked what I saw. It seems they have cleaned up quite a bit and are trying to simplify their corporate holding structure and list their shares on the Taiwan stock exchange ( that's a nice catalyst that could lead to revaluation by the market). They also have improved their balance sheet considerably and their GMs also seemed to have improved since I looked at them last. Although, the fact that their GMs are this low means that they don't have much of a competitive advantage or pricing power and little "cushion" ( that does not make the company 'uninvestable', just risky, as they can get crushed during a severe down cycle and see profitability vanish).

 

As for EV/EBITDA ratios, I am sure you are aware  that for cyclical industries like semiconductors, P/E or EV/EBITDA ratios get smaller at or near the peak of the cycle, so it's always better to look at the normalized earnings or EBITDA over a complete cycle ( although going by your numbers, if the ratio is already at 2 then there is not much downside, unless the normalized EBITDA over the cycle is very poor and the outlook for the company or industry is dire). Also I am assuming that there's no one time items included in the calculation.

 

It seems like they have been reducing their cap-ex guidance for 2014. They seem to have pulled in some cap-ex from 2014 to meet customer demands. This is fine as long as they don't get caught flat footed when the cycle eventually turns and demand falls and they have to idle capacity. Excess idle capacity can spell trouble. Idle machinery/equipment/facilities can soon become obsolete as cycles can be very short in this industry. A risk for the companies in this segment of the industry is that they have huge fixed costs (as a proportion of their revenues) and often need to spend constantly in order to keep up with the trends in technology and meet the demands of the customer, who often have very short product cycles. Machinery and facilities need to be constantly upgraded to accommodate new generation of chips. The recurring high amounts of spending may also lead to liquidity risks for companies that are heavily indebted.Moreover, when you service big customers like Micron, you fortunes can become tied to that customer and that segment of the semiconductor industry ( look at NTE for how it can affect a company when it invests in new facility and machinery and the customer decides to go elsewhere). Although, that may not be a big risk if the company is adequately diversified across other business segments. 

 

I don't know if that was of any help and if I said anything you didn't know already ! Good luck with your investment.

 

 

[infinitee00]

I am surprised and happy to see so many boardmembers here are in the semiconductor industry.

 

I, myself, am a so called "device" manager for a major semiconductor foundry. The last assignment that I had is to develop their 28HP and 28HPM devices. I led about 25 device engineers to built the transistors for these technologies and interlocked with customers to make sure they could use these transistors successfully. 

 

Like infinitee00 said, semiconductor industry is a very large and diverse industry. Somehow, I have never felt comfortable investing in any companies in this industry as I am acutely aware of how ignorant I am about the business side of things.

 

On the other hand, my job also essentially precludes me from investing in semiconductor companies.

 

Major semiconductor foundry in Taiwan that is working on 28HP devices ? Hmm ! Wonder who could that be ?

 

You might as well have given us the name of your company and customers  !  :D ( Don't worry though, it is public knowledge and you are not violating confidentiality agreements)

 

Anyway , glad to see the another industry insider here.

[infinitee00]

@infinite, thx for the analysis. What if Flir was trading at 12-13 PE levels tho? It looked interesting to me at those prices because it seems infrared will be going into the main stream with prices coming down so much. There are alot of practical uses for cheap infrared, and they seem positioned to profit from that a couple of years down the line.

 

It seems one advantage is cost because of scale right? If they manage to increase their market share above 60%, shouldn't that give them some kind of cost/quality advantage? Even when chips are no longer being improved much technically. Which seems to also be part of their edge.

 

And interesting about the buybacks, You would say that the CEO would be aligned, owning about 70 million$ worth of stock.

 

I actually had a GTC bid at $19 for FLIR ( at around the P/E levels you mentioned) but then got greedy and reduced it to $17. Order didn't get filled and I forgot about it. Guess who looks like an idiot now ?!

 

Increasing market share too much beyond 60% would be very difficult. The incremental cost vs market share gain would be very high. Moreover, this is not an Intel vs AMD match-up. Fluke is a solid competitor.  Notwithstanding IR optical instrument mkt share, if FLIR can execute their plans successfully in the other segments, the business should do well in terms of revenues. How the margins will look after that maybe a different story altogether.

[Lance]

Lawyer, licensed in Texas and England & Wales.

 

Thanks,

Lance

[zippy1]

I am surprised and happy to see so many boardmembers here are in the semiconductor industry.

 

I, myself, am a so called "device" manager for a major semiconductor foundry. The last assignment that I had is to develop their 28HP and 28HPM devices. I led about 25 device engineers to built the transistors for these technologies and interlocked with customers to make sure they could use these transistors successfully. 

 

Like infinitee00 said, semiconductor industry is a very large and diverse industry. Somehow, I have never felt comfortable investing in any companies in this industry as I am acutely aware of how ignorant I am about the business side of things.

 

On the other hand, my job also essentially precludes me from investing in semiconductor companies.

 

Major semiconductor foundry in Taiwan that is working on 28HP devices ? Hmm ! Wonder who could that be ?

 

You might as well have given us the name of your company and customers  !  :D ( Don't worry though, it is public knowledge and you are not violating confidentiality agreements)

 

Anyway , glad to see the another industry insider here.

:) 

It was a mission that I am proud to have done as it made company quite some money.

My involvement indeed is public. 

 

[infinitee00]

Any particular reason you like Marvell versus other chip makes like Interdigtal that may be cheaper?  I also always wondered why Cirrus Logic trades a discount to other chip makers that have similar margins?  TIA.

 

Packer

 

Nothing escapes 'The Great' Packers analytical eyes !

 

I bought MRVL around the end of 2012 when the market was more concerned about their legal problems ( although I bought before the jury award). I thought the jury award was preposterous and discounted the probability that CMU was ever going to get paid that amount. According to my calculations at that time, I estimated that MRVL should be able to get to $600-$650M of normalized EBITDA going forward and the market was over reacting to the legal risk. At the current valuation, MRVL is getting close to my sell point and estimated EBITDA multiple. In recent weeks, rumors about a KKR led buyout has boosted the stock, however I am not going to hold out based on it, if it reaches my sell target.

 

I do not have much insight into IDCC. It's balance sheet looks great and it earns pretty good royalties/fees on it patent portfolio, but there's something about patent valuation and their business model of "pay us licensing fees or we will sue" is something I don't understand.

 

As for Cirrus, market reactions and opinions are difficult to explain. I think CRUS had a great ride hitching it's wagon to Apple's rising fortunes but what has happened lately IMO is that the market has grown skeptical about the possibility of CRUS being able to maintain it's growth and margins -given that majority of it can be attributed to Apple ( I think ~ 80% of revs come from Apple). Growing at a pace it has grown the last few years is not sustainable long term, so the market is somewhat justified in its skepticism. Also, given that the outlook for Apple has cooled somewhat  since last year ( difficult to see reading this board) and the recent loss of some business from Apple is fueling this speculation that CRUS's EBITDA and GMs will take a hit going forward and they might lose more business. If I remember correctly mgmt has also indicated they might see slightly reduced margins, although revenues may continue to grow. Thirdly, if you consider that the semiconductor industry goes through cycles every 3-7 years, and we are already in the 5-6th year of the current cycle, the market may just be displaying some caution going forward since revs and margins can drop significantly in a down cycle.

 

 

[BG2008]

Patent law  - 25 years; mostly in the computer, software, and communications areas; education - electrical engineering.

 

Wow, very impressed.  Have you taken a look at STRP?

 

Thanks.

 

STRP just hosted a conference call and they mentioned that they are expecting a settlement soon.  I like the asset like approach that the company is taking to monetize the patents and the spectrum.  They estimated that the current cash balance can last 5 years with a $3mm annual cash burn.  The NOL will shield income for over $100 million.  The separation from IDT Corp is critical to make sure that the defendants don't go after IDT Corp. 

[dpetrescu]

Infinite,

Do you have any thoughts why IMOS is valued so low (related to type of work they do and outlook/risks in their industry)? In General why others in this sector have low valuations?

 

IMOS had an EV/EBITDA of less than 2 (not a typo) and a decent/low PE and very low debt. There are other companies in this sector with EV/EBITDA of 3, 5, 6. IMOS is the largest independent provider of testing and assembly services for flat panel display and memory semiconductors. The do a lot of work for Micron. As of Right before the new year it is about 7% of my portfolio.

 

Thanks,

Daniel

 

I have not looked at IMOS lately, so your research may be years ahead of mine. I remember looking at IMOS a while back, along with ASX and AMKR but decided to pass. At the time,  the CEO or chairman was being investigated for misappropriating funds and the company had a convoluted holding structure ( red flags for me). Moreover their historical FCFs looked poor and debt levels looked high. So wasn't very keen on spending more time researching the company.

 

However I looked at it very briefly after your post and liked what I saw. It seems they have cleaned up quite a bit and are trying to simplify their corporate holding structure and list their shares on the Taiwan stock exchange ( that's a nice catalyst that could lead to revaluation by the market). They also have improved their balance sheet considerably and their GMs also seemed to have improved since I looked at them last. Although, the fact that their GMs are this low means that they don't have much of a competitive advantage or pricing power and little "cushion" ( that does not make the company 'uninvestable', just risky, as they can get crushed during a severe down cycle and see profitability vanish).

 

As for EV/EBITDA ratios, I am sure you are aware  that for cyclical industries like semiconductors, P/E or EV/EBITDA ratios get smaller at or near the peak of the cycle, so it's always better to look at the normalized earnings or EBITDA over a complete cycle ( although going by your numbers, if the ratio is already at 2 then there is not much downside, unless the normalized EBITDA over the cycle is very poor and the outlook for the company or industry is dire). Also I am assuming that there's no one time items included in the calculation.

 

It seems like they have been reducing their cap-ex guidance for 2014. They seem to have pulled in some cap-ex from 2014 to meet customer demands. This is fine as long as they don't get caught flat footed when the cycle eventually turns and demand falls and they have to idle capacity. Excess idle capacity can spell trouble. Idle machinery/equipment/facilities can soon become obsolete as cycles can be very short in this industry. A risk for the companies in this segment of the industry is that they have huge fixed costs (as a proportion of their revenues) and often need to spend constantly in order to keep up with the trends in technology and meet the demands of the customer, who often have very short product cycles. Machinery and facilities need to be constantly upgraded to accommodate new generation of chips. The recurring high amounts of spending may also lead to liquidity risks for companies that are heavily indebted.Moreover, when you service big customers like Micron, you fortunes can become tied to that customer and that segment of the semiconductor industry ( look at NTE for how it can affect a company when it invests in new facility and machinery and the customer decides to go elsewhere). Although, that may not be a big risk if the company is adequately diversified across other business segments. 

 

I don't know if that was of any help and if I said anything you didn't know already ! Good luck with your investment.

 

Thanks for the response. It is a great resource with so many people from different backgrounds.

 

True about The risks. The stock collapsed during the recession exactly because of a grossly mistimed great cap ex expansion as well as very large debt right before the recession. That difference between that depreciation and current lower cap ex is resulting in large free cash flows. Since 2009, the amount of debt they paid off plus cash they raised and now hold is bigger than their current market cap.

[Packer16]

Any particular reason you like Marvell versus other chip makes like Interdigtal that may be cheaper?  I also always wondered why Cirrus Logic trades a discount to other chip makers that have similar margins?  TIA.

 

Packer

 

Nothing escapes 'The Great' Packers analytical eyes !

 

I bought MRVL around the end of 2012 when the market was more concerned about their legal problems ( although I bought before the jury award). I thought the jury award was preposterous and discounted the probability that CMU was ever going to get paid that amount. According to my calculations at that time, I estimated that MRVL should be able to get to $600-$650M of normalized EBITDA going forward and the market was over reacting to the legal risk. At the current valuation, MRVL is getting close to my sell point and estimated EBITDA multiple. In recent weeks, rumors about a KKR led buyout has boosted the stock, however I am not going to hold out based on it, if it reaches my sell target.

 

I do not have much insight into IDCC. It's balance sheet looks great and it earns pretty good royalties/fees on it patent portfolio, but there's something about patent valuation and their business model of "pay us licensing fees or we will sue" is something I don't understand.

 

As for Cirrus, market reactions and opinions are difficult to explain. I think CRUS had a great ride hitching it's wagon to Apple's rising fortunes but what has happened lately IMO is that the market has grown skeptical about the possibility of CRUS being able to maintain it's growth and margins -given that majority of it can be attributed to Apple ( I think ~ 80% of revs come from Apple). Growing at a pace it has grown the last few years is not sustainable long term, so the market is somewhat justified in its skepticism. Also, given that the outlook for Apple has cooled somewhat  since last year ( difficult to see reading this board) and the recent loss of some business from Apple is fueling this speculation that CRUS's EBITDA and GMs will take a hit going forward and they might lose more business. If I remember correctly mgmt has also indicated they might see slightly reduced margins, although revenues may continue to grow. Thirdly, if you consider that the semiconductor industry goes through cycles every 3-7 years, and we are already in the 5-6th year of the current cycle, the market may just be displaying some caution going forward since revs and margins can drop significantly in a down cycle.

 

Thanks for the response.  From one former chip guy, a long time ago before they "closed the loop", thanks for the insights.  The chip companies are nice space if you can get the right price.  The only one that I like that was recently cheap enough (but is on the fence now) is Vishay.  Not flashy but a sold company and another holding of Howard Marks.

 

Packer

[no_thanks]

Structured Finance / Securitization  17 years

 

Wow, I bet that has been a wild 17 yrs.  I would love to hear more.

 

 

 

 

 

[Rainforesthiker]

Patent law  - 25 years; mostly in the computer, software, and communications areas; education - electrical engineering.

 

Wow, very impressed.  Have you taken a look at STRP?

 

Thanks.

 

I have not taken a look at STRP.  I really don't invest in the technology sector, primarily because the business models in technology are not nearly as stable as other industries.  In other words, technology changes so fast that, even for someone in the industry, from an investing standpoint it is hard to pick the winners and losers 5 or more years out. 

In a (very) brief look I do note that part of STRP's valuation appears to be based on their patent portfolio and/or patent infringement lawsuits.  One caution that I would offer up re a patent portfolio as an investment is that patents are one of the few assets that I can think of where the value could literally disappear overnight.  For example, say the company owns a great patent (or group of patents) that it believes to be very valuable.  Some heretofore unknown prior art could surface tomorrow that could gut most or all of the value of those patents.  I can't really think of many other assets whose value could disappear so quickly and without warning.  Also, patent infringement litigation is very dicey.  The way our patent litigation system is set up, it is designed to select a group of decision-makers (a jury of 12) with absolutely the least ability to decide the merits of the case.  There is no way a jury can assess the merits of a high tech patent case, so in reality all they can do is attempt to figure out who is being the least honest.  Thus patent infringement trials devolve into elaborate and expensive productions that are based more on finding and producing incriminating and inconsistent documents from the other side.  Patent litigation is thus very expensive.  Also most patent litigators will tell you that no matter how good your case is, your chances are 70% at best.    Plus you have to factor in that defendants in patent cases now get multiple bites at the apple, e.g., they can attack patents in a post-grant reexamination process and also separately at trial.  Finally, the appeals court that hears patent cases (the Federal Circuit) appears to be largely anti-patent these days, and you also have a legislative backlash against patent owners due to the patent trolls.  Thus from an investor's standpoint I would rather own a humdrum low-tech business than a high tech one with lots of patents.  Just my 2 cents.

[infinitee00]

 

Thanks for the response.  From one former chip guy, a long time ago before they "closed the loop", thanks for the insights.  The chip companies are nice space if you can get the right price.  The only one that I like that was recently cheap enough (but is on the fence now) is Vishay.  Not flashy but a sold company and another holding of Howard Marks.

 

Packer

 

My pleasure Packer. Agree about Vishay. Stable company with revenues well diversified, although a slow grower. Btw, didn't know Marks had it in his portfolio.