Cabot Microelectronics' Pristine Balance Sheet Makes It a Buy

Cabot Microelectronics (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.

Comments

[Dan Jacome:]

Not touching CCMP until 50 day breaches the 200 day to the upside; sticking with bull calls on AMAT, LRCX, WFR in the semi cap eqpt space

2008 Mar 25 11:52 PM

[Dan Jacome:]

I met with CCMP management this past summer; they conceded the larger chem players were impacting their business, at least on the margin. Until the entire group sees inventories thin and the Cap EX environment improves, I'd shy away from semi cap stocks. We're probably not bottoming yet. If I see big ticket items (photolithography: ASML, CYMI) starting to see orders really ramp, we'll get more incrementally positive on the area.

2008 Mar 25 11:56 PM

[S. Roberts:]

There's a significant problem using the past performance and current cash flow to project future performance with CCMP - it does not take into account the fact that the CMP slurry market that is their primary revenue generator has gone from a high margin product area to a very commodity product area. Today's cash is based on current contracts, etc. Go see what prices on copper slurries (or any slurries) are in Asia right now, on new products: instead of the $30+/gal it was only a couple of years ago, I heard someone at a trade show discussing prices at $10 and less, sometimes far less.

2008 Mar 26 02:38 PM

[Dan Jacome:]

"CMP slurry market that is their primary revenue generator has gone from a high margin product area to a very commodity product area. "

thank you. AMEN.

2008 Mar 28 04:41 PM

[S. Roberts:]

I'm always suspicious of someone publishing an article pushing a stock that they will make money on if the price goes up. Particularly, as in this case, when they apparently have no clue about the market in which the stock participates. CMC recently laid off a number of people, not good for a growth tech stock, their market is heavy into a commodity mode now which greatly reduces their cash, their share of the market is going down, and the entire slurry market is becoming extremely bloody. To quote the stock price immediately after their IPO as a sign of what it could be, and to ignore that their market has gone through a significant change in the last couple of years, does make me question the recommendation of someone who owns their stock and who is pushing it (also, most coverage has either held steady or in the case of Longbow downgraded CMPP.)

2008 Apr 07 10:51 AM