Description
A no brainer. Alliance Semiconductor sells for the value of its publicly traded investment holdings, giving us the Alliance Ventures venture capital operation and the semiconductor manufacturing business for free.
We are not surprised to find this kind of value, as the Street frequently is late at identifying these kinds of values. While we might agree that part of the problem is that a large part of the value of ALSC is wrapped up in a company traded on the Taiwanese stock exchange, we don’t believe that it deserves a 50% haircut.
Its publicly traded holdings are as follows:
383.3 million shares UMC $1,030.77 million
(Taiwan company #2303 $83 TWD * .032 US$ per TWD* = $2.69 per
share)
2.14 million ADRs Chartered Semiconductor (NASDAQ:CHRT $92.00)
$ 196.88 million
306,000 shares Broadcom (NASDAQ:BRCM $261.44)
$ 80.00 million
79,000 shares PMC-Sierra (NASDAQ:PMCS $229.50)
$ 18.131 million
852,000 shares Vitesse Semiconductor (NASDAQ: VTSS $73.56)
$ 62.675 million
Total $1,348.46 million
ALSC Market Cap $1,099.00 million
While there is some confusion about where we are in the semiconductor cycle, we think we have found in Alliance Semiconductor an investment with built-in downside protection.
While it looks like fiscal 2000 (ending April 1, 2000) was a monster year, the operating results were significantly overwhelmed by the gains recognition involved with the merger of several of ALSC’s investments. Without those gains, fiscal 2000operating earnings were $195,000 or $0.00 versus an operating loss of $0.95 in fiscal 1999. Consensus estimates look for earnings of $0.56 per share in fiscal 2001 and $0.77 per share in fiscal 2002. Earnings growth from fiscal 2001 to 2002 is estimated at more than 35%. While the cyclicality of the semiconductor business makes it difficult to estimate sales and earnings growth with any confidence, we would expect the company’s primary markets (multimedia, networking and telecommunications equipment) to continue to post strong growth for at least the next five years. In particular, Alliance’s low-power SRAM technology will be particularly important in the growing wireless market.
We do not expect ALSC to see peak earnings until some time in fiscal 2003 – particularly in light of the importance of its products into the wireless marketplace. Given our expectations for a continuation of the current up trend in the semiconductor cycle, we view the current multiple to fiscal 2002 earnings of roughly 35 times as reasonable. Assuming that the company is able to maintain the current multiple, and the market begins to give the company credit for its hidden assets, we would expect to see the stock price to move closer to $58 or more than 100% above current levels. However, even if we are wrong about the length of the current semiconductor cycle, we feel that the stock should begin to reflect some of its underlying asset values, and should be valued closer to $40 per share or more than 50% higher than current levels.
Catalyst
We believe that the current difficulties in the technology arena will cause investors to focus on real underlying values. We believe that Alliance Semi offers investors exposure to attractive sectors of the technology marketplace at very attractive values.