Rubicon (RBCN) blew through the top end of earnings expectations in the company's Q4 announcement and raised guidance for the quarter ahead. This stands in stark contrast to the fact that there remains a massive short in the stock equivalent to 12.6 days of cover or a massive 62% of the float. This short has dogged the stock for the past seven months, ensuring a poor performance in terms of the stock price. However, in the end earnings and revenues matter - and those shorts are now likely to be under serious pressure.
In terms of the earnings numbers themselves, earnings per share for Q4 came in at 64 cents against expectations of only 50 cents. That was on revenues of $29.5m against $26.79m expected. Moreover, the company raised guidance significantly for Q1 2001 - giving a range of 62 - 65 cents versus expectations of only 52 cents per share.
Over the period since last summer the market has continually worried that Rubicon's revenues and margins would suffer as a result of a combination of a downturn in final demand in the market for flat-screen LCD TVs and the pressure of new entrants coming into the market. Rubicon surprised on the upside in the company's last earnings as well. However, this failed to calm fears. However, these latest numbers now make the more positive story very difficult to deny.
In their conference call after the close, Rubcon's management were very clear that they face very strong visible demand and no pressure on prices:
- They have not seen evidence of the slippage in wafer prices reported by others in the market in Q1 and expect prices to remain stable in Q2
- This is the case through from 2" to 4" and 6" diameter wafers
- There are new entrants in the market but they offer little competition amongst Rubicon's customer base
- Although Rubicon produces 2" and 4" coarse wafers, they expect the majority of their earnings to come from 6" diameters by the end of the year. Moreover, with the 6" product they offer only polished wafers.
- They believe that they are a key producer in terms of their ability to produce at volume and with the consistency required by their larger customers. There are new entrants who offer 6" diameters and a polished finished product - but they can only offer smaller volumes at present.
- Consequently, Rubicon continues to benefit from additional margins in the 6" polished product due to lack of competition.
- Finally, they see LED OEMs increasingly ramping up in capacity requiring 6" wafers this year - and this should lead to new customers and orders.
Given the earnings numbers to back up this view of Rubicon's competitive position, it is difficult to argue the contrary.
Meanwhile, the current short in Rubicon looks increasingly exposed. I wrote an article in late November of last year arguing that at 60% of the float the short position was looking out of kilter with the earnings performance.
During the course of 2010 the short position in Rubicon grew inexorably, increasing from 4 million shares at the beginning of the year to a high of 10.47m in October - or 60% of the float. From there the short roughly topped out into January. However, the latest numbers show an increase once again to 10.7m - or 62% of the float by the end of last month.
To put this in perspective, the table below shows the short position of Rubicon against that of two other players in its industry - CREE and VECO.
|Short Interest (M)||Days to Cover||% of Float|
As I argued back in November, a short position of some 20% of the float would normally be seen to be fairly large. As you can see, from this perspective the shorts in both CREE and VECO look reasonably significant. However, in terms of both days to cover and per cent of float neither remotely compares to the short currently in position against Rubicon.
In my opinion, in the face of Rubicon's very convincing earnings performance these positions will find it increasingly difficult to maintain themselves. In my last article, I argued that we could eventually see something of a short squeeze. The time for such a development may be upon us soon.
As I also argued in my last article, there is strength in numbers - but that is never true in an overcrowded trade.