Things just just seem to be getting worse and worse for the semiconductor industry. According to trade group SEMI, Q2 Worldwide semiconductor manufacturing equipment billings were down 26% from the first quarter of ‘08 and nearly 30% from Q2 ‘07. Moreover, the Philadelphia Stock Exchange Semiconductor Index (1-yr. chart below) hit its lowest point since 2004 on Monday and is down nearly 35% from last September.
‘08 Semicon Spending to Approach ‘05 Levels
The writing was on the wall by the end of 2007 as the overall industry failed to record double digit growth for the first time in its existence. For the record, the worldwide semiconductor space generated just under $274 Billion in revenues according to Gartner for a measly 3.8% increase over the prior year.
Looking forward, SEMI also stated this week that worldwide semiconductor equipment bookings were off 13% and 30% from Q1 ‘08 and Q2 ‘07 respectively. Commenting on the downtrend, SEMI’s senior director of industry research Dan Tracy recently commented: “Spending for new semiconductor equipment is down considerably as anticipated,”. “Overall 2008 spending will approach 2005 levels, with a recovery expected for next year.”
As I’ve mentioned in previous editions, an industry downturn, although troubling for manufacturers, presents a unique opportunity for companies boasting solutions that help improve margins. One company in our portfolio poised to do just that is Legacy Holding Inc. (OTCPK: LGYH).
For the record, Legacy is the only semiconductor-related company to ever win the prestigious U.S. EPA ‘Green Chemistry’ Award. In a rough and tumble economic environment the company’s technology demonstrates a significant value proposition for the $7 billion per year silicon wafer cleaning industry in 4- key ways:
1. Improving wafer processing time by 200%;
2. Enhancing oxide removal control by 92%;
3. Decreasing costs by 22% by reducing the amount of consumable materials used in wafer cleaning; and
4. Reducing particles left on the wafer after cleaning by 76%.
As equipment manufacturers strive to survive over the next 6-12 months while spending on their products dips, Legacy could in theory benefit from the overall industry downturn. The company has already proven itself to some extent through established relationships with Tyco, Micrel Systems, Silicon Genesis, the largest semiconductor equipment manufacturer and the largest solder bump deposition manufacturer worldwide.
In terms of generating business in a down market, Legacy’s CEO should be able to leverage his extensive rolodex of contacts into the development of new contracts.
CEO Has More Than 30 Years of Experience
If you’re not overly familiar with the company, at the risk of repeating myself for the upteenth time, Robert R. Matthews is a chemist with nearly 30 years of experience in the semiconductor industry with time spent as a process engineer at Texas Instruments (NYSE:TXN) and Intel Corp. (NASDAQ: INTC ). Mr. Matthews has also fostered deep ties with other leading semiconductor-related organizations including Applied Materials (NASDAQ: AMAT ).
What About the Stock?
After steadily losing value since around 7/30, the stock gained some steam on Tuesday, advancing more than 8% on nearly 25,000 shares traded. Who knows? Maybe the market has finally woken up and digested Legacy’s recent annual filing which exhibits a year-over-year revenue increase of 537% and net income of $101,846 in 2007.
Or maybe it was their recent quarterly filing. For the 3 months ended 6/30/08, Legacy logged net income of $92,618 on revenue of $222,334 vs. a net income of $48,809 on revenue of $182,778 in the corresponding quarter of ‘07.
The company also recorded a positive net income per share of $.01 vs. $.0 during the same period of ‘07. In regards to income from operations on a quarterly basis, LGYH made some significant improvements, decreasing operating expenses by nearly $40,000 and notching operating income of roughly $93,000 vs. about $35,00 in the corresponding quarter of ‘07. All in all, Legacy’s financial performance improved by just about every possible metric on both an annualized and quarterly basis. Something to take into heavy consideration when deciding whether or not to get into the stock’s next potential run.
Don’t forget, after nearly 4 months of losing value from March to June, LGYH rebounded back valiantly in late July before giving back nearly 100% over the past few months. I’ll be watching closely this morning to see if we are indeed about to witness yet another uptrend. Tuesday marked the first green close in more than 13 trading sessions, and we also saw some of the heaviest volume in the stock in quite some time, so, I strongly suggest putting Legacy on your radar screen this morning. Trust me, you’ll be glad that you did!
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