Camtek Should Be CAN'T

| About: Camtek Ltd. (CAMT)

Camtek (NASDAQ:CAMT) shares have seen rapid appreciation and unusual volatility in the past few weeks, and many SA authors have begun to weigh in on both sides of the valuation debate. The company has two main business segments:

  • automated solutions for enhancing production processes for semiconductors
  • selling systems for manufacturing and packaging and the printed circuit board (PCB) and integrated circuit (IC) substrates.

This article will argue that not only is CAMT overvalued, but that it is in danger of severe deterioration to the latter portion of its business model. This includes the "Greenjet 3D" PCB printing initiative (hereafter referred to as solder mask printing, since the former term is misleading), making it a non-starter. I will further discuss current market share fundamentals, which can be used to explain and predict share movement.

The Competitive Landscape for PCBs

If you don't know what PCBs are or don't have a fair bit of knowledge regarding how they are manufactured, then you should not be investing in the industry. This bull article actually gives a reasonably fair overview. However, the author is an investment analyst who issues opinions on a great many stocks. Not being a veteran of the computing industry he fails to observe that board-level photonics are set to virtually obsolete Camtek's PCB business over the next few years. The announcement by International Business Machines (NYSE:IBM) and Dow Corning, which is a joint venture between Dow Chemical (NYSE:DOW) and Corning (NYSE:GLW), said, "We are confident that silicone-based board-level interconnects will quickly supersede conventional electronic signal distribution." As a veteran of the high-speed computing industry, I look forward to benefiting from the remarkable speed and heat improvements that have already been tested and confirmed. As a veteran investor, I share confidence in seeing these innovations brought to market soon, given the vast resources and market capitalization behind this development.

Even bulls concede that Greenjet 3D will take years to ramp up, but it's also important to note that solder mask printing is not actually new. Camtek acquired some technology in 2009 from Israeli printer developer Printar and has been attempting to market it ever since. Noting the original cache dates on this Google search shows that the company's pages on the actual technology involved have remained materially unchanged since at least that point. Management recently backed up this assertion with a 6-K which says they know of no public information could be deemed responsible for the sharp rise in share price.

Furthermore, PCB manufacturers object strongly to being locked into processes requiring a single material vendor, since doing so would undercut their ability to maintain both price and quality controls. Given the changing technology, PCB makers are unlikely to shell-out top dollar to a company whose management has clearly mislabeled their offering as "3D printing" in order to take advantage of investor enthusiasm. The only way to safely realize any cost savings would be to open material supply up to other vendors. Even if Camtek were to do this, it would undercut much of blade-and-razor economics that have been used to propose such lofty valuations for CAMT. If the company is seeing little competition for this model, it simply re-emphasizes broad recognition that they are in a business sector that is nearing the end of its life cycle.

Current Market Situation

In light of the unchanged company fundamentals, it seems clear that the recent spate of articles (rather than fundamental developments in CAMT) resulted in a temporary short squeeze, helping to push shares higher. Short data covering the period when the articles were published won't be available for another week, however a recent check of the rebate rates shows that the squeeze is already beginning to subside and that investors can expect an eventual return to historical valuation around $2):

Date Rebate Rate
03-DEC-13 8.32%
02-DEC-13 8.52%
01-DEC-13 8.72%
30-NOV-13 8.72%
29-NOV-13 40.34%
28-NOV-13 72.08%
27-NOV-13 37.10%
26-NOV-13 2.00%
25-NOV-13 2.50%
24-NOV-13 3.12%
Click to enlarge

Given the historically low trading volume (typically only 10-20 thousand shares) it's not surprising that shares moved so sharply. This is further magnified by the lack of options availability for CAMT, since options would likely be favored for reactionary positions by savvy investors. Nonetheless, I suspect that even Camtek management is aware of the competitive landscape discussed above. The company has not been performing well, missing consensus estimates 3 out 4 times over the past year. I would not be surprised to see insider sales, or a dilutive offering in months to come, if current prices hold. This doesn't seem likely, but we'll have to look at short data next week for a better assessment.

In the meantime, Camtek shares represent a viable (though dangerous, given the volatility) short opportunity for sophisticated investors who are well-versed in short-selling. I will follow with data on the ebbing of the short squeeze as it becomes available. Retail investors should avoid the stock like the proverbial plague. This doesn't really warrant in-depth analysis; prior year earnings would have to increase by a factor of ~50 in order to come in line with typical manufacturing P/E multiples. To say that the chances of that happening are "beyond remote" would still be putting it euphemistically. It would probably be more accurate to say that CAMT simply CAN'T grow into its current valuation.

Disclosure: I am short CAMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.