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A Nanotech Revolution
03/10/2006 12:00 am EST
"The early beneficiaries of the nanotech revolution are the ‘pick and shovel makers,’ who provide the tools for this gold rush of corporate and government funding," says industry expert Josh Wolfe. While noting their volatility, he has two favorite nanotech toolmakers.
"The two nanotech instrument makers in our Nanosphere portfolio have been very volatile. From the beginning of the year through early February, shares of FEI Corporation (FEIC NASDAQ) rose 25%, thanks largely to takeover speculation. But after setting a new 52-week high of $26, the stock abruptly tumbled back to a recent $20. Turns out the merger discussions were off, and FEI's fourth quarter loss of $30.7 million ($0.91 per share) was wider than expected.
"Meanwhile, FEI is currently going through a painful restructuring which includes cutbacks and layoffs. In the short term this is producing losses and many of the analysts have scaled back their estimates. But I think the company will emerge much stronger and we still rate FEIC a buy in our portfolio given its leadership position, product portfolio, and the stock's reasonable valuation.
"FEI's nanotech tools include focused ion and electron-beam instruments that deliver 3-D characterization, analysis, and modification capabilities. The latest addition to FEI's nanotool arsenal is the high-end Titan transmission electron microscope, which received industry praise in 2005 for its highly advanced ability to characterize the smallest of nanoparticles. Installations of the first Titan system began in late 2005, and FEI is increasing production to keep up with growing demand.
"Our other portfolio toolmaker, Veeco Instruments (VECO NASDAQ) announced a strong fourth quarter in 2005, but issued cautious guidance for the first quarter. Veeco generated GAAP earnings of $2.7 million ($0.09 per share), compared with a loss of $56 million ($1.88 per share) for the same period last year. To most, this would be good news. However, Veeco issued tepid earnings guidance for the first quarter of 2006. I think Veeco has learned from its past mistakes and will from now on be issuing conservative guidance.
"From an operational and market share standpoint, Veeco is the reigning heavyweight in an expanding, but increasingly competitive field for atomic force microscopes (AFMs). Approximately 39% of the company's AFM revenues were generated from data storage customers, followed by scientific (26%), semiconductor (20%) and high brightness LEDs (15%). Where does nanotech fit into this list? Everywhere.
"My affiliated institutional research firm, Lux Research, projects the market for nanotech tools will grow from $580 million in 2004 to $1.1 billion in 2010. The current market is dominated by inspection tools. The outlook for the next five years, however, looks very different as growth will depend on corporate R&D rather than the largely saturated university and national lab market. In the near term, Wall Street analysts foresee a surge in semiconductor markets this year. That is good news for Veeco and FEI, our portfolio's two nanotech toolmakers."
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