Robbie Stephens Conference: Gruber Speaks Out on Tech

SAN FRANCISCO -- Here's the real worth of an investment conference like the BancBoston Robertson Stephens Technology '99 Conference: a chance encounter in the elevator with Jon Gruber, fund manager with San Francisco's Gruber & McBaine.

Gruber has been called the father of technology investing and is famously impatient with journalists. Six months ago, he was long communications-chip makers TranSwitch (TXCC) and Vitesse Semiconductor (VTSS), two of the most-watched stocks in the semiconductor sector. This elevator ride seemed like a good opportunity to check up on those investments.

"TranSwitch?" he asked with a smile. "I bought it at 7 -- and don't write that down! I sold it all a month ago." (A month ago, it was trading around 39. It closed Thursday at 37 1/4, up 3/4.)

Gruber is still holding tight to Vitesse. "You can write this down," he said. "[Vitesse CEO] Lou Tomasetta is the smartest CEO I know."

Return to the Bowling Alleys

Investors who have driven up the price of chip-equipment maker Applied Materials (AMAT) 186% since Oct. 8 have been waiting for assurance that revenue growth will justify the stock price. At a Thursday presentation at the BancBoston conference, CFO Joseph Bronson didn't disappoint.

Applied Materials' customers are looking at revenue growth of 9% this year, driven by growth in sales of personal computers. Bronson now sees the possibility that demand in the chip industry will exceed production capacity in 2000 by almost 5%. "That hasn't happened since 1994," he said. "We are watching this very carefully. This is a very key thing."

Why is this so important? Because undercapacity means that chipmakers have to expand their facilities. And to do that, they will have to increase their capital-equipment budgets, something the industry hasn't done in two years.

But that's not going to happen this year. Bronson said capital-equipment spending will likely decrease 7% this year, and no more than five new manufacturing plants are coming on line. New plants mean new orders for equipment companies. "In good years," added Robbie analyst Sue Billat, "you could have many times that. Five is a very low number."

If the big increase in chip demand expected in 2000 happens more quickly, chip companies might finally decide to complete the shells of manufacturing plants left unfinished when PC demand fell in 1997. "We call them bowling alleys," Bronson said. "Those fabs could be equipped."

Bronson sees higher profit margins in the future as a result of Applied Materials' corporate restructuring during the recent downturn. Now if the company can gear up for a return to heavy business without heavy hiring, it can produce a 50% gross margin for the first time.

Bronson had one last tidbit to tell fund managers: "For anyone who wants to buy the stock," he said, "it is down 4 points." It closed Thursday down 4 1/2 at 63 3/4.

Don't Look Back

Applied is by far the biggest of the equipment companies, but it isn't the only one seeing evidence of a rebound. At a presentation by competitor Novellus Systems (NVLS), CFO Robert Smith said the company has a longstanding goal of 15% year-over-year growth in revenue and profits, and he expects to return to that rate by the fourth quarter of this year. The company ended last year with only a 10.2% growth rate.

Ray Rund, an analyst with Cleveland-based Shaker Investments, said after the presentation that he wished his fund had bought into chip-equipment stocks back in the summer. It missed that boat, he said. "We are always a little late getting in on these guys," he said. "We thought materials would come back before equipment would."

On that line of thought, Shaker bought thin-film maker ATMI (ATMI), which saw a mere 82% growth in its stock price since October compared to 190% for Novellus.

He can't complain too much, though. The fund has done nicely with communications semiconductor companies such as RF Micro Devices (RFMD). In the time Novellus rose 190%, RF Micro rose 381%. "You have to make a choice," Rund said. "You can't buy everything."

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