Stock Mart: Electroglas

Chip-equipment makers like Electroglas are just starting to see business pour in.
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Chip-equipment stocks tend to be predictable. For about three years, they rise as chipmakers load up manufacturing plants with new equipment to meet changing technology. Then, demand peaks, and the equipment makers struggle until the next technology change three years later. The trick for investors is to time their investments right.

Expectations that the industry is starting the climb up has already boosted leaders like

Applied Materials

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to sky-high levels. But the stocks of smaller companies like



, a Santa Clara, Calif.-based maker of wafer probes, machines used to spot defects in semiconductors, have lagged.

"The test equipment industry is seeing a very significant upturn and usually the market for wafer probers is not far behind," says Edward White, an analyst at

Lehman Brothers

who has an outperform rating on the stock.

Electroglas, he says, just shipped an evaluation unit to a major chipmaker, and it will likely ship one to another chipmaker in the third quarter. These are products that sell for $650,000 each. "We are seeing the real early stages of interest," he says. (Lehman Brothers hasn't been an underwriter for Electroglas.)

Electroglas is one of the oldest equipment makers in the chip industry, dating back some four decades to the beginning of semiconductors, says Jeff Hinke, an Electroglas spokesman. For the last 25 years, it exclusively made wafer probers. Three years ago, Chairman and CEO Curt Wozniak joined the company and began to diversify the product line. In 1997, the company acquired a designer of inspection software, and in 1998, it bought a maker of optical machines that allows chipmakers to visually inspect the wafers.

Yang Lie, an analyst with money manager

M.J. Whitman Advisers

, which has held Electroglas since 1997, says the ability to sell both inspection software and hardware is rare. With Electroglas products, chipmakers can get information on chip defects from its testers and feed the data quickly to the start of the chip production line. So companies can spot the problems and fix them quickly. "That's a big, big deal," Lie says. Only two other companies supply wafer probers, she adds, and because market share has been evenly spread among all three players, price competition is low.

Hinke, the company spokesman, says Electroglas introduced two new products designed to sell into the latest chip trends: one for the manufacturing of high-performance microprocessors, and another for new 300 millimeter wafer fabrication plants for which


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recently announced huge investments.

To be sure, the company, like the industry, has had a rough time lately. It lost money for six straight quarters until the most recent quarter, when it broke even. The stock also suffered, trading as low as 7 3/4, where it bottomed on Oct. 9.

But since then, it has risen 143%, closing up 1/2 at 18 7/8 Friday. But compare that to the 233% rise that equipment Applied Materials has seen over the same period. And at 18 7/8, Electroglas is still almost half off its all-time high of 35 7/8 that it hit in August 1997. White at Lehman says there's still plenty of room for the stock to rise.

He recently raised his 2000 earnings estimate for Electroglas to 85 cents a share from 75 cents and believes that when the market peaks in 2002, the company will earn $2 a share. The

First Call

consensus calls for Electroglas to earn 6 cents a share this quarter and 13 cents a share in the fourth quarter, giving it a loss of 10 cents per share for 1999.

The company reported a book-to-bill ratio of 1.15 for the second quarter, meaning that 1.15 new orders came in for every order shipped out. A book-to-bill of more than one is generally seen as a sign of health for an equipment maker.

"The growth outlook between now and 2002 is quite favorable," White says. "There is so much going on in the semiconductor industry to test advanced chips."