Stock Black Book’s idea this month is one of those rare opportunities to buy a company that is discounted so deeply you get almost as much cash in the bank as the company is worth. This limits the down side risk assuming it continues to deliver positive free cash flow [FCF], which it has done the past three years in a row. The part that is even better is they have no debt so you get to keep all the cash. Sound too good to be true, well it’s not. This is the great part about a cyclical business like semiconductors. When the market is angry investors have a huge opportunity to take a relatively low risk investment. Last month I brought to your attention a well run company with a large amount of debt. This month I decided to discuss the opposite extreme.

Company Profile Form Factor (FORM) designs, develops, manufactures, sells and supports high performance advanced semi conductor wafer probe cards. This is an industry I am very familiar with and will help show you the value proposition that a company like FORM has to offer to their customers. FORM has a proprietary microspring technology that allows their customers to buy leading edge advanced technology to test full silicon wafers in the DRAM and Flash markets. DRAM and Flash are both crucial memory products that are part of the bill of materials for items like computers, cell phones, iPods, digital cameras and many other consumer electronics. DRAM currently makes up 70% of their revenue, Flash is 18% and Logic is 12%. This is a critical test for semiconductor companies as it allows them to sort good die (product) from bad die to avoid adding more value to a bad product (i.e. throwing money away). This would be like checking to see if a loaf of bread is moldy before adding all the meats, cheese, vegetables and condiments so you avoid wasting food. The die is expensive, but the value added later by packaging it, testing it and stacking it with other working die can be very costly and significantly erode margins if not caught early in the manufacturing process. FORM makes every probe card custom for every customer and each product a customer manufactures. This is a very specialized high margin business used to make commodities that produce relatively lower margins.

United Rentals (URI) is the first company many commercial, industrial, utilities, municipalities, and homeowners think of when they have large projects and need equipment and supplies to complete the job. URI has rental/retail locations in the US, Canada, and Mexico with nearly 700 locations. If you need to rent or purchase equipment such as backhoes, forklifts, compressors, pumps, generators, scissor lifts, boom lifts, pressure washers, water pumps, heaters, hand tools and trench safety equipment, then URI is where you go. It offers over 20K classes of rental equipment and services equipment.

URI also trains customers in specialized work, and offers an entire line of convenient supplies to its customers for their specific needs on the job. Commercial business is 75% of their revenue, while industrial is 15% and homeowners round out the last 10%. URI was a start-up business 10 years ago (founded in 1997) and has grown to a $3.6B+ per year business through acquisitions and internal growth. They compete in a highly fragmented business and have the #1 market share in North America with only 7% (This means lots of opportunity for growth).

American Eagle Outfitters (AEO) is a staple clothing retailer in most US and Canadian malls that caters to the 15 to 25 year old demographic. It is in the process of expanding its concept store Martin + OSA to focus on the under served 25 to 40 year old market, as well as other new concepts that should be strong growth drivers in the future. AEO has very strong brand recognition with 12 to 19 year olds and is ranked 2^nd only behind Nike in a spring 2007 survey by Teen Research Unlimited.

AEO opened it’s first store in 1977 and has a loyal customer base that has grown up alongside the company. Since their core American Eagle stores cater to a younger crowd they have wisely decided to proliferate a new concept Martin + OSA. Many of AEO’s customers that grow out of their core styles will now have an additional option to patronize AEO for another 10 to 20 years at this new concept (i.e. more sales/profits from existing customers).