A First Look at TechValue

04/01/2005 12:00 am EST

Focus:

Mark Mowrey

Senior Analyst, Al Frank Asset Management

John Buckingham is well known for the top-performing The Prudent Speculator newsletter. Now, along with editor Mark Mowrey, he has introduced the new TechValue Report. Here, we offer the "Stock of the Month" from the inaugural issue of the letter.

"Our basic premise for investment in the semiconductor space stems from the fact that chips are making their way into more and more devices in a trend toward the computerization of an almost overwhelming number of everyday products. This has led us to include several chip stocks in our new TechValue portfolio, including one notably undervalued company, Mattson Technology (MTSN NASDAQ).

"The semiconductor industry is in the midst of a shift from wafers that are 200mm in diameter to those that are 300mm. Mattson was quick to address this shift and is now the leader in the 300mm 'dry strip' market. The key to Mattson's ongoing success will be its ability to further assist semiconductor manufacturers in the race to produce chips with much smaller details on larger silicon wafers. For example, Mattson is developing processes to use for feature lengths below 45 nanometers where the precision of the RTP process is measured in thousands of seconds.

""Mattson also competes in the rapid thermal processing (RTP) market. Mattson's main product works somewhat like a photocopier, that emits light from above and below the paper. In this device, lamps on both sides very quickly bake the wafer in order to make permanent desired properties of the transistors. The advantage of Mattson's technology is that the double-sided nature of the equipment helps to ensure this brief yet intense process results in maximum adherence to the desired characteristics in the finished product.

"Mattson has focused on these two technology segments, choosing to compete on precision instead of price. This narrow product focus supported by strong R&D efforts appears to be an appropriate strategy for a smaller company in an industry bent on technological advancement. Mattson's choice thus appeals to our inner strategic consultant. Of course, we can't help but notice the fact that the company carries more than a fifth of its valuation in cash and equivalents ($1.79 per share) on the balance sheet, with the remainder trading at around ten times trailing earnings.

"We’d add that the stock recently fell sharply despite no news. Our guess is that this was due to some large stockholder looking to sell, at a time that there just weren't enough buyers around to consume the sale. Indeed, the average daily trading volume in MTSN shares in the 15 March trading days leading up to March 22 was 235,000 shares. March 22 saw 6.95 million shares change hands, and a 10% decline in the shares. Despite this weakness, we continue to believe Mattson is a leader in its chosen fields of focus, maintains a cash-heavy and debt-free balance sheet, and the stock remains priced at reasonable metrics, trading at less than 13 times trailing earnings and 2.1 times book value. Our target price on the shares is $21."

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