The semiconductor market has rallied sharply in the last three months as investors bet that the industry's horrendous multi-year slump has ended. In sympathy, shares of excimer laser vendor
, whose products are used in making semiconductors, have doubled to more than $30 in the last 10 weeks. Curiously, three directors and a company vice president have seen fit to buy company stock
much of the surge.
That's the first sign of buying activity in more than a year. Insiders may have been tempted by the fact that the stock, despite the recent rebound, still trades for less than half the price it hit two years ago.
More importantly, the fundamentals of Cymer's business have clearly stabilized. Cymer told analysts to expect fourth-quarter revenue to be flat with third-quarter levels. While hardly ideal, key competitors of Cymer's have been issuing negative guidance.
And sequential growth soon could be in the cards for Cymer. Its gear is bought by semiconductor manufacturers at the start of an upgrade cycle, so demand for Cymer's equipment is effectively a leading indicator.
Cymer controls 85% of the market for deep ultraviolet (DUV) photolithography systems, which are used in the processing of certain types of semiconductor wafers. These systems use lasers that produce a beam of just 248 nanometers (roughly one-fourth of a micron) in diameter. Cymer sells its products to the leading component manufacturers, which in turn sell the gear to chipmakers like
The market for Cymer's advanced laser systems had been growing 30% annually since 1995 until the recent slowdown crimped growth. But industry analysts contend that strong growth should resume when the industry rebounds and begins to upgrade its equipment. With industry leader Intel currently ordering new equipment, an upgrade cycle arguably has begun already.
Before 248-nanometer systems became standard equipment for semiconductor manufacturers, the industry was using mercury arc lamps instead of lasers. With arc lamps, however, the widths of lines etched into wafers could not be narrower than the light beam used in the process.
But the new laser systems in which Cymer holds such a commanding share use "reticle enhancement technology" and "optical proximity correction" to etch lines narrower than the laser beam itself. Companies like Intel can use Cymer's new 193-nanometer laser to produce line widths as small as 70-100 nanometers.
With such a commanding share of its niche market, it is fair to be concerned that Cymer's penetration has nowhere to go but down. After all, Germany's
and Japan's Gigaphoton also make competing products.
Cymer is hardly standing still, however, and even in the poor economic environment of the past year has spent more than 20% of its revenue on R&D. With investments such as this, the company intends to try to reproduce its success in the 248-nanometer equipment market in the new 193-nanometer equipment market. In fact, Cymer already has its eyes on 157-nanometer lasers.
Also, as Cymer's vice president of marketing, Brian Klene, points out, "old wavelengths don't go away when there is an upgrade. Just as there are still arc lamps in use, there will also be a continuing need for 248-nanometer equipment in the future." And the more Cymer equipment out there, the more the company can make on the consumables and replacement parts its equipment uses.
"Consumables are already a fairly significant part of our business, generating slightly less than one-third our present revenues," Klene says. Cymer also has expanded vertically by investing in inspection applications used in semiconductor processing.
All in the Timing
While the scenario for Cymer's return to growth is clear, the timing of when it could happen is not. A rebound in the world's economy is a necessary ingredient, and timing that eventuality is the problem. Also, although leaders like Intel are all pushing as quickly as possible to make 100-nanometer and smaller line widths a reality, Klene cautions that "there are always technical problems associated with decreasing line widths."
Nonetheless, Wall Street already has begun upgrading the stock even though EPS expectations are hardly worth writing home about.
But the recent insider transactions add more comfort to taking a position in CYMI now. Of the three insiders buying into Cymer's turnaround, the 10,000 share purchase by director Kenneth Deemer is the most informative. Deemer is a long-time director at Cymer who has traded its stock impressively.
After purchasing CYMI for $9.50 in September 1996, he began selling just three months later as the stock rose past $40. He sold more shares in 1997 for more than $50 a share. When CYMI tanked with the rest of its peers in 1998, Deemer bought again. He didn't catch it at the bottom, but he did double and quadruple his money when he sold in 1999. Now he's buying again.
Don't expect a ride on CYMI to be a smooth ascent, but odds are it will deliver an excellent return for anyone with a 12-month investment horizon.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland had a position in Cymer, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to
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