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Stock Mart: Silicon Valley Group

If you want to make a bet on the semiconductor sector but figure Intel (INTC) looks a little too rich, then take a look further up the assembly line.

Silicon Valley Group (SVGI), a San Jose, Calif.-based semiconductor-processing equipment company, is about to benefit from a turnaround in the semiconductor business, according to one buy-side analyst and one money manager. A pickup in demand for chips means Intel and others will be knocking on Silicon Valley's door for its specialized equipment and services, they say.

And given Silicon Valley's depressed stock price -- it closed Friday at 10 3/4, up 3/16 -- the risk is low compared with the potential rewards, they believe. Its price-to-earnings ratio, based on the 2000 First Call/Thomson Financial estimate of 51 cents a share, is about 21. Its price-to-sales ratio is about 0.9. Value investors look for stocks with price-to-sales ratios below one. And it trades for below its book value of $16.35 a share, according to data-tracker Baseline.

"They are going to benefit as the whole equipment group will see an incredible increase in spending in the next six to eight quarters," says the money manager, who's long the stock and asked to remain anonymous. "I think in the fourth quarter of this year -- which is their first quarter -- they would be moderately turning." By the middle of next year, earnings momentum should pick up.

He figures the stock could double in the next year. Its 52-week low is 6 5/8, while its 52-week high is 17 11/16.

Before the stock sees that kind of increase, however, the company will have to improve earnings. In the nine months ended June 30, Silicon Valley recorded a net loss of $27.1 million, or 82 cents a share. For the year ended Sept. 30, Silicon Valley is expected to report a loss of 83 cents, though it's expected to pare its losses to a penny a share in its fiscal fourth quarter.

Yang Lie, an analyst at shareholder Third Avenue funds, says the losses have been due more to industry cyclicals than to any management problems. Papken Der Torossian has been its chief executive officer since 1986 and its chairman since 1991.

Silicon Valley agrees. "We all got hit. The whole industry got hit by the cyclical nature of the business," says Werner Rust, the company's director of marketing.

Formed in 1977, Silicon Valley specializes in advanced photolithography exposure systems. That's still one of its lines, but it also makes so-called photoresist processing equipment and is in the chemical vapor deposition market. In layman's terms, Rust explains, Silicon Valley makes chip-building tools for about 20% to 25% of the more than 600 steps in the process that takes place to build those chips while they are in the wafers, or building trays.

In Silicon Valley's sectors of the business, it's considered a high-end player and has a dominant market share, the money manager says. But in order to realize its potential, it needs to expand its customer list.

"The downside to Silicon Valley is that they are very dependent on just a few customers, Intel being one of them. If they could increase their customer base, they would see growth," Lie says.

Silicon Valley's customers include Intel, Motorola (MOT), IBM (IBM) and Hewlett-Packard (HWP).

Silicon Valley's Rust says the company has long acknowledged its need to build customers. "I think we're very aware of this. We're seen as a very U.S.-based company," he says. "We have a strong presence in Europe, but Asia has been a weak point."

In July, Silicon Valley bought Palo Alto, Calif.-based Watkins-Johnson's (WT) semiconductor equipment group for $6 million plus debt. The purchase included products that Silicon Valley planned to merge into its thermal systems business. That business, the money manager says, could help Silicon Valley expand its customer list.

And if Intel's too expensive, at least you'll invest with the giant when it comes to Silicon Valley. In May, Intel invested $15 million in Silicon Valley for a 4.7% stake.

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