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III-V Industry Stocks Reach Bottom?

The NASDAQ stock exchange has lost 40% of its value in the last 12 months, and the shares of most III-V players have fared worse. Well chosen acquisitions and manufacturing efficiency separate the winners and losers, finds Andy Extance.

The entire world has struggled against recession over the past year, and compound semiconductor companies were not immune. Across the community, management and employees have counted the cost of lost jobs, restructured operations and dramatic revaluations.



But the financial storm has not affected all equally. Some markets and companies have proven to be fitter than others and kept their head above the rising tide of trouble. Can they now emerge from the past 12 months of cost-cutting and sprint ahead of their rivals? If so, who are the likely winners? Despite the damage inflicted by the downturn on the confidence of the general public in investors, comparing share prices reveals a lot about who is poised to prosper.

That the share prices of just two companies in Compound Semiconductor s 20 key stocks have gone up over the past year reflects the level of the crisis. The NASDAQ composite stock market index fell by nearly 40% over the same period.

For those companies unfortunate enough to have been hit by additional complications the plunge has been much greater. Three have lost more than 70% of their stock market value. At the very bottom, if you had put all of your savings into AXT in May 2008, you would now have less than 17% of your original investment. Since then, the three Chinese joint ventures that had previously boosted the Fremont, CA, company s business by providing cheap gallium, arsenic and germanium have presented difficulties.



While LED makers couldn t manufacture quickly enough for the eye-catching displays at the Beijing Olympics, AXT was paralyzed by material shipping restrictions imposed by the Chinese government during the games. More recently the global recession ground the aluminum plant that houses and supplies power to a gallium-producing joint venture to a halt. These events combined with the fall in demand from handsets that tumbled AXT s revenues from $19.6 million in the first three months of 2008 to $7.7 million for the same period in 2009. With this sales contraction it seems hardly surprising that AXT has seen the biggest drop in share price in the III-V sector this year, and former CEO Phil Yin left the company in March.

Although Emcore would have been almost as disastrous an investment, wiping nearly 80% off its May 2008 share price, the firm has enjoyed a comparatively quiet year. The extent of the Albuquerque, NM, company s fall in value is perhaps best understood by the phenomenal rise of its share price from a low of $4.60 to a high of $15.90 in the previous year. With shares sliding to $1.26 on April 30 it looks like the III-V solar business that originally gained it attention from investors has continued to lose credibility.

Written off?
Wounded power amplifier (PA) maker Anadigics completes the industry s most troubled trio. Its problems began as far back as late 2007, when it was unable to fulfill customer orders. Handset manufacturers then built up buffers of stock before switching to other suppliers early in summer 2008.

Mario Rivas has since replaced Bami Bastani as CEO and tightened up production at the company s Warren, NJ, fab. Perhaps in response to this – and the company s boasts of industry-leading PAs that are winning business back – Anadigics share price is now recovering after reaching a bottom on March 9. However, that date also marks the nadir for many of the other leaderboard companies.

Looking at the key GaAs PA makers, all but one firm s share price began rising on March 9. That company is Skyworks Solutions, whose stock began recovering in December. Skyworks outperformed the NASDAQ index by having essentially the same share price at the beginning of May 2008 and May 2009. But scrutinizing the share price of the Woburn, MA, company reveals that it has been subject to a similar rollercoaster ride of rises and falls in value as its rivals, except that it has fallen less and risen more.

Throughout the period, the chipmaker s manufacturing efficiency has garnered positive comments from investment analysts. "Skyworks has posted consistently strong results in recent quarters, significantly outperforming peers," pointed out Todd Koffman of financial services company Raymond James. Although Skyworks recorded a loss in the three months ended March, sales exceeded those of its rival RF Micro Devices (RFMD) for the second quarter in succession. With RFMD traditionally claiming the highest GaAs wireless chip sales by some way, this could mark a key turning point in the industry.

RFMD has failed to make a profit since its purchase of Sirenza in late 2007. Over recent months those losses have been worsened by the same deal. Sirenza initially cost RFMD $300 million in cash and $600 million worth of stock. However, RFMD was forced to cut its valuation of those assets by $673 million, in line with how its own value on the stock market has fallen. $768 million in total revaluation charges have been added to RFMD s losses over the past two quarters. The $33.9 million hit taken by the last of the four leading US PA manufacturers, TriQuint Semiconductor, on its acquisitions of WJ Communications and Peak Devices, seems modest by comparison.

Other high-profile III-V manufacturers have also been forced to make similar eye-popping "write-down" and "goodwill impairment" charges as their share prices crumbled this year. Optoelectronic giant JDSU s finances were hit by $745 million in the past two quarters. However, this year s troubles can be put in some context by reflecting that the Milpitas, CA, company suffered a $44.8 billion charge when the optical communications bubble burst in 2001.

Dutch electronics conglomerate Philips revised its valuation of its LED manufacturing subsidiary Lumileds down by €233 million ($317 million), showing that even the solid-state lighting industry is not immune to the credit crunch. However, fellow industry leader Cree s 2.5% share-price growth over the last year, albeit modest in absolute terms, marks it out as a clear winner in today s economy. The Durham, NC, company has spent lavishly on acquisitions of luminaire developer LED Lighting Fixtures and Taiwanese LED packager COTCO in recent years. However, in contrast to nearly all of the other firms, Cree s sales continue to grow year on year, making it appear that the additions have slotted in well.

A similar comment could be made about the company at the summit of our leaderboard – MBE system manufacturer Riber. At the end of 2008 it bought the rights to the Oxford Instruments MBE system business that was originally VG Semicon. The French company s rights to support existing installed reactors will further boost the spares and services business that helped increase its revenues to €19 million in 2008.

Since March 9, the stock market falls that we have seen appear to be reversing. But the dramatic price changes have exposed the differences between efficient firms, like Skyworks, and the hapless.

  

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