Cabot Microelectronics' Pristine Balance Sheet Makes It a Buy

| About: Cabot Microelectronics (CCMP)

Cabot Microelectronics (NASDAQ:CCMP) is a leading supplier of high-performance polishing slurries used in a process called Chemical Mechanical Planarization or CMP. This is a critical step in the manufacture of semiconductors.

CCMP has developed unique slurries for specialized processes including copper, and magnetic heads for hard drives. Asian sales represent around 67% of revenues with 23% in the US and 10% in Europe.

Cabot Micro earned $1.48 in the FY ended last September. December showed a big improvement with top line growth of 14% and net quarterly profits up 34% [$0.51 versus $0.38]. Last year's March quarter was only $0.19 and consensus estimates for the period now wrapping up are at $0.42 - more than double on a year-over-year basis. For the FY ending this September the forecast is for $1.91 or + 29% from FY 2007.

Based on the estimate above, CCMP's current year P/E is just 16.6x - the lowest ever for this company. Based on next FY's estimate of $2.13 it is < 15x.

The 'net P/E' looks even lower when you consider Cabot Micro's balance sheet. At year-end 2007 they held over $209 MM cash plus $34 MM more in receivables less accounts payable. Total debt was just $4.4 MM. With only 23.7 MM shares outstanding this small-cap company has over $10/share in cash and equivilents. Backing out that amount from the share price would make the P/E a very low 11.3x current year's expectations.

Officers & Directors hold about 9.9% of all shares.

Other Large Holders [as of Dec. 31, 2007]:
2007's YE Closing Price was $36.90

Shapiro Cap. Mgt............13.09%
Royce & Associates..........8.92%
Snyder Cap. Mgt..............8.16%
Clearbridge Advisors..........8.08%
Kornitzer Cap. Mgt............6.73%
Lord Abbett & Co.............5.63%
Barclays Global Inv.............4.96%
Bank Of America...............4.65%
Fiduciary Mgt....................3.99%
Renaissance Tech. Corp.....3.87%

Value Line gives CCMP a financial strength rating of B+ [only because they never assign their top ratings to small-caps]. They rate Cabot Micro's earnings predictability at the 80th percentile [with 100 being best]. This is quite high in the technology field.

Cabot Micorelectronics has never had an average annual P/E below 20.8 since coming public in 2000. Value Line is assumimg a 20 multiple for their 3 - 5 year projections. At 20x this year's $1.91 estimate I get a minimum target price of $38.20 before next year or up 20.8% from today's closing quote.

Is that a reasonable expectation? Absolutely. CCMP shares have hit peak prices of $38.40 to $58.30 at some point in each of the past 8 years. During the tech insanity of 2000 - 2001 they actually traded over $100.

This is a growth company albeit one with an erratic pattern.

From 2000 to 2007: sales per share have gone from $7.68 to $14.09
.............................cash flow / share went from $1.60 to $2.48
............................ book value / share climbed from $4.56 to $17.21

CCMP is a lightly followed smallcap with a pristine balance sheet and nice earnings momentum to boot. Risk looks fairly low and upside quite decent.

Disclosure: I am long shares and short puts on CCMP.