Stock Mart: Amkor

Packaging chips is bound to be a huge business as manufacturers increasingly outsource the task.
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It's hard to get excited about semiconductor packaging, which in the technology world is the equivalent of a corrugated box. But every computer, cell phone or

PalmPilot

needs a chip, and every chip needs a package.

Making these packages is something semiconductor companies once did in-house, but then again, they also used to make their own chips -- nowadays there are "fabless" chip companies that contract out that task. And, more and more, outside contractors like

Amkor

(AMKR) - Get Report

are hired to package the product as well.

That growth potential isn't apparent in Amkor's stock, trading at just 14 times trailing earnings and 12 times the 1999 estimated earnings. It also carries a price-to-sales ratio of 0.61. Value investors often search for companies with price-to-sales ratios below one. At Friday's close, the stock was up 1/8, or 1%, at 9 1/16, but 18% below its $11 May 1998 IPO price.

Part of the problem is that the company is an offshoot of the troubled Korean-owned semiconductor manufacturer,

Anam Group

, with whom it still maintains a complex relationship. Amkor is in the process of issuing $625 million in debt to finance the purchase of a large manufacturing plant from Anan. And until that's completed, the Street likely will be reluctant to dive into the stock, says Vernon Essi, an analyst with

Adams Harkness & Hill

.

However, Scott Gates, a portfolio manager at the $3 billion

Gardner Lewis Asset Management

, an Amkor investor, likes the pending plant purchase. The plant produces 35% gross margins, he says, and that should lift Amkor's gross margins, which were just 15% in the March quarter.

But Amkor's main attraction is its growth, which was displayed in the March quarter when it generated revenues of $420 million, up 13% from the year-earlier period. It earned $19 million, or 16 cents per share, in the first quarter, compared to $9.6 million, or 12 cents per share, the year before. (Per-share data reflects the sale of 35.3 million shares in the May 1998 IPO.)

The company is expected to earn 72 cents a share for the current year, according to the

First Call

analysts' consensus, up from 66 cents a share for 1998.

"From a fundamental perspective everything is absolutely fantastic," says Gates, the money manager. "Units have been increasing month to month since December. Clearly their business turned in December."

And observers expect that it will continue to grow.

"What they do is a huge growth industry," says Essi, who rates the company a strong buy. "Right now only one-third of

the business is outsourced and eventually all of it is going to be outsourced." (Adams Harness is not an underwriter of Amkor.)

The entire chip packaging market is expected to grow from $21.8 billion in 1998 to $40 billion in 2001, an 83% increase. But package outsourcing should grow even faster, says Amkor spokesman Jeff Luth, from an estimated $4.6 billion in 1998 to $9.3 billion in 2001, which is more than a 100% increase. "Some people here suggest that's conservative," he says.

Why so much growth? As information devices get smaller, the chips shrink in size even as their designs become more complex. And that creates the need for more specialized skills in chip packaging, which also is becoming more complex. "People think all we do is put them into cellophane bags," Luth says. "We have to bring the package down to the level of the chip itself."

And Amkor is the leader in outsourced chip packaging, holding a 30% share of the market, Luth says, with the remaining share spread over a fragmented group of companies. Within its share, Amkor is picky; most of its business is in more complex packaging, which can command higher prices and is expected to show the highest growth. "We don't play in DRAMs or most microprocessors," Luth says.

Chip manufacturers, says money manager Gates, are trying to cut costs any way they can. "

Motorola

(MOT)

just sold their packaging plants," he says. "Those

chip companies who have the latest and greatest packages are the ones who will benefit most."

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