Making a Value Case for Axcelis Technologies

Sep.17.09 | About: Axcelis Technologies, (ACLS)

Axcelis Technologies (ACLS) manufactures processing equipment used in manufacture of semiconductor chips and sells to customers worldwide. The down cycle in semiconductors coupled with the ongoing recession has hurt Axcelis’ business considerably. Axcelis also defaulted on a note with US Bank early in the year (which they subsequently paid off with proceeds from its 50% stake in SEN to Sumitomo Heavy). Continuing losses quarter over quarter have also caused significant cash burn and the company had to restructure significantly. Consequently, the stock price of the company is down the drain.

There is no guarantee that the semiconductor cycle will turn upwards in the near future. Even if it does (and it is quite likely that the generally improving economic conditions will spark new capital expenditures at the business level improving the prospects of the semiconductor industry), there is still no guarantee that Axcelis will be able to benefit from any improvement in the semiconductor industry prospects. The company sells highly specialized type of equipment where technological advances can easily make the current product line obsolete. If the company continues to operate at a loss it will continue to burn through its cash and that is a real risk that demands a large margin of safety.

If you are scared by this already, that's perfect! This is where a value investor gets interested.

Let’s look at the financial state of the company:

  • There is an adjusted book value of 201.09 – 41.39 = $159.7 m
  • The stock currently trades at a capitalization of $85 m or at a discount of 46.77%.

Please note that we may have been more conservative than necessary in discounting the inventory and PPE valuations. The company is definitely worth more than $160 m that we calculated to a strategic buyer in the industry based on the assets alone. There is also value to the company’s patents and other intellectual capital that is not reflected here. As such, the current levels of the stock price is an attractive point of entry for a value investor.

In fact, this company trades at a discount to its net-net valuation in the classic Graham and Dodd sense (Current Assets my Total Liabilities = $138.26 on an adjusted basis or $182.76 on an unadjusted basis giving a discount of 38.5% or 53.5% depending on how you look at it).

Caution: Management has stated that the cash burn in the future will be significantly reduced having taken all the restructuring charges they needed to take. Also if the business climate does not improve, additional losses will impair the book value further. While the margin of safety is sufficient to initiate a position, it warrants keeping a close eye on the company fundamentals in the coming quarters. If the Asset valuation declines significantly, it may be necessary to exit our equity stake. I think the risk-rewards on this stock are quite favorable if the economy continues to improve as there is also a potential for another company in the industry to recognize the value and step in for an acquisition.