Tuesday, November 24, 2009

TTM Technologies (TTMI) Merges with Meadville

On November 16, 2009 TTM Technologies (Nasdaq: TTMI) announced that it would be merging with Meadville Holdings Limited. Both companies are in the printed circuit board (PCB) manufacturing business. TTM is the largest PCB manufacturer by revenue in the United States, but was not in the top 10 such companies worldwide. Meadville is listed on the Hong Kong exchange and is somewhat larger than TTM.

TTM has been looking for a Asian acquisition for as long as I can remember. The U.S. PCB industry has been on the ropes for over a decade because of competition from overseas, especially from Asian companies. TTM, and some of its American rivals, have survived and even prospered by specializing in a few areas. One is low volume production where the savings from going overseas are outweighed by the logistics of it. While we tend to think of electronics as high-volume items, in fact outside of the consumer sector often industrial kit is made in low volume.

Another area where some American companies have retained an advantage is high-technology. These are not your Dad's PCBs. They have multiple layers of conductors and insulators and tiny thru-holes drilled with lasers. TTM specializes in high-end boards and provides engineering support to customers.

Quick turn-around time, aka the quick-turn segment, is also quite profitable. This is often for prototypes during the development phase of a project. A company might want ten prototype boards, and it wants them ASAP. TTM does quick turn.

Still, TTM has wanted to be a one-shop solution for its customers. Typically for high volume products, where cost per board is an issue, TTM's customers have gone elsewhere.

Meadville is just what TTM has been looking for, although it is much larger than I expected the acquisition would be. Meadville has good standard technology capabilities, so it will benefit from TTM's cutting edge ability. Meadville has the high-volume capacity that will allow TTM to become a one-stop shop. Meadville has a variety of factories in various locations in China.

Merged into TTM, the companies will form the third largest PCB company in the world. Meadville will be spinning off its PCB laminate manufacturing division as part of the deal.

Meadville has a lot of debt that enabled it to acquire the capital equipment and smaller companies it needed to expand rapidly. New credit facilities of $582 million are being provided by Hong Kong banks. However, both TTM and Meadville have been generating cash, even during the recession, so on first impression it seems they should be able to pay down the debt over time without too much difficulty.

TTM is buying Meadville with cash and common stock. As a result Meadville investors will own about 45% of the merged company.

Due to the large number of PCB companies in the U.S., this merger is not likely to be seen as anti-competitive by U.S. regulatory agencies. However, issues arise because a significant proportion of TTM's business is from defense contracting. The Department of Defense and the Committee on Foreign Investment in the U.S. (CFIUS) must approve the deal before it goes through. Management did not think that would be a problem once protocols were established to keep Defense information secure. But one analyst at the conference claimed the largest Meadville stockholder is "close to" the Chinese Communist government, and rather than asking management a question seemed to be saying she (or whoever was using her, possibly Taiwanese interests) thought the merger should be disallowed by CFIUS.

Mergers are always tricky, but I believe TTM has been very cautious in looking for this acquisition and has done its due diligence. It will probably take a good year or so after the merger, however, before we see any result of its synergies.

For a report on TTM's latest financial results, see my TTMI Q3 2009 analyst conference summary. Also see TTM Technology press release on Meadville Holdings merger.

And of course Meadville Holdings Limited.

Wednesday, November 18, 2009

The Gold Bubble

I correctly called bubbles in the stock market in the late 1990's, in the housing market, and in oil [See Oil Bubble to Burst, [March 11, 2008]. I believe there is a bubble in gold right now. I am not saying the bubble will pop soon, or at what price; seeing a bubble is a lot easier than saying when it will pop.

The magic of gold is purely psychological, and mainly a historic artifact. Gold is pretty and does not tarnish, so it makes nice jewelry. It is just uncommon enough that finding and mining it is usually not easy. Hence when money was invented, gold was adopted for use in coins.

Gold has more uses now. Of course it is used in dentistry. Its main use, besides jewelry, is in electronics. Gold is an excelent conductor of electricity, and does not corrode, so it is used to plate contacts on the best-quality electronic products. Because they are much cheaper, silver and copper are more widely used.

Gold investors often believe that gold is the ultimated measure of value. But its intrinsic value is negligible. If it were more common it might be regarded as a cheap anti-corrosion metal.

A lot of gold is being hoarded around the world. As in typical in auction markets, as long as the price is going up, people are given incentive to hold onto their gold stock, no matter how high it goes. That is how auction markets create bubbles.

But study history and you will find there have been many times and places where gold was not highly valued in comparison to other commodities. If something else is desirable enough, it is worth its weight in gold. Famously, salt was once traded in some places in Africa weight to weight with gold.

A new gold find can cause gold inflation. This happened when the Spanish stole the gold of Mexico and Peru in the 1500s. Europe at that time could not aborb that much gold, so the price of gold relative to other commodities swooned. Much of the gold migrated to China and India, which then had far more robust economies than the European nations.

The ratio of the price of gold to silver used to be a big, big deal back when money mostly meant metal coinage. It was the prominent issue in the U.S. Presidential campaign of 1896, in which the Democratic Party "declared for the unlimited coinage of silver at the ratio of sixteen ounces of silver to one of gold, though the market ratio was about thirty-two to one" as a means of getting more money into circulation [The American Pageant by Thomas Bailey, p. 599]. The Republican Candidate, William McKinley, won the Presidency after his campaign outspent his pro-silver rival sixteen to one.

Today, as I write, the quoted values of ounces of gold and silver are $1141.30 and $18.42. That gives a price ratio of about 62 to 1. Historically they have mainly fallen between 10 to 1 and 40 to 1. So if history is any indicator, either the price of silver has to skyrocket or the price of gold has to plunge to get us to equilibrium. It is possible that when the bubble bursts both will plunge in tandem.

One relatively sound source of gold's strength has been the weak dollar. The theory is that gold stays stationary in value. Therefore, if the dollar falls, the value of gold in dollars should rise. Of course normally financial brains would see right through that simple equation. The dollar should fall against any currency that rises against the dollar, if the theory were valid.

More fundamental is the usual fall in the value of goods versus currency when there is slack demand. In other words, deflation. There is concern that the astonishing amount of fictional money pumped into the American economy by the Federal Reserve starting in 2008 is going to cause the opposite, a great inflation. So the high price of gold, under that theory, is about looking ahead to the coming inflation. But the newly pumped money, so far, has not even replaced the money that dissappeared in the Great Panic of 2008. So it is a bit early to place heavy bets on inflation. If the Fed starts raising interest rates in 2010, and raises them fast enough, inflation should be held to its normal pace.

Like everything auctioned, the price of gold at any given time is highly dependent on the dynamics of the auction system. On an upswing people have every reason to delay selling in order to get higher prices at a later date. This in itself can create shortages that cycle into higher prices.

But there are always mini-cycles within the larger cycles. No one thinks much of a drop of a few pennies in the price of gold during the course of a trading day.

During a bubble at some point enough people will bail out to drive down the price of the asset enough for other holders to notice. If this trend become prolonged or deep, all the theories in the world won't support the price of the asset. Once gold starts falling consistently, people will realize it is not a magical store of value. They will trade their gold for something they can actually spend or invest more profitably.

Of course a gold bubble could also be popped by the discovery of a new gold field.

What confirms for me that we are in a gold bubble is that normally, during a severe recession, all asset classes are sold by investors. Gold should have come down subtantially in price in 2008 and 2009. Perhaps gold investors are more conservative by nature than those who invest in asset classes, so that they were not leveraged, and did not need to sell. I don't get that impression from the few big-time gold bugs I have met, but some times anecdotal evidence is misleading.

Remember, gold could go a lot higher before the bubble bursts. Shorting gold is no more a sure thing than going long on it.

Hedge your bets: keep diversified!

William P. Meyers

Thursday, November 12, 2009

Shortages for Electronics, Semiconductor and Computer Makers

Listening to a variety analyst conferences this last couple of weeks I heard a variety of executives mention shortages of the components they needed to manufacture their own products. Some simply had to scurry to get parts, others lost sales because they were unable to deliver product.

Extreme Networks, EXTR, for instance, was unable to manufacture its latest and greatest network switching devices in sufficient quantity. They had let their inventories get too low.

Integrated Silicon Solutions, ISSI, reported that there was a shortage of wafers (the starting point for making their memory devices), but that they actually sold more than expected because their rivals in the SRAM and specialty DRAM market were not able to make deliveries.

NVIDIA, NVDA, had the most serious problem I heard. They make graphics processors for computers and mobile devices. NVIDIA's third quarter revenues grew 16% sequentially, but they believe they could have shipped $50 million to $100 million more in product if they had product to ship. The problem was mainly in the newest, high-end graphics chips. TSMC, the foundry that makes them for NVIDIA [and makes much of the world's semiconductors], could not make the chips fast enough. Partly this was due to low process yields on the latest, most miniaturized technology.

AMD's graphics processor segment probably picked up some of the slack, but they are also using TSMC and can't get enough of their newest product either. However, they apparently did a better job anticipating demand than NVIDIA did.

Dot Hill, HILL, was able to get enough disks to ship their storage units to HP, NetApp, and other customers, but reported that they had to work hard to get enough disks and could not guarantee they could get as many disks as they will need in the fourth quarter if demand continues to ramp.

There are probably many more examples, and of course there are always companies products aren't competitive and so are not worried about shortages. But the general pattern is clear. From bottom to top, inventories were taken too low earlier this year, and manufacturing capacity was cut back too much.

Much of the increase in end-user demand is coming from China, but there is a buildup in demand in the United States off the lows of late 2008 to early 2009.

I am expecting robust growth in most segments of the global semiconductor, networking, and computer equipment industry during 2010.

Even capital equipment makers like Applied Materials, AMAT, are looking at a return of demand. It might seem that since on the whole demand is still lower than in 2008, foundries would not need to be buying new semiconductor manufacturing equipment yet. But just as new, better, higher capacity products are always being designed, the machinery for making them has to be upgraded. If someone wants 33nm parts, you can't make them with 90 nm tools. So it now makes sense to buy newer, higher-technology equipment rather than simply restarting production lines that make parts that are no longer in demand.

Disclaimer: I own shares of AMD, HILL, and AMAT. I do not own shares of the other companies mentioned (as of today). - William P. Meyers

Monday, November 9, 2009

Akamai, Microchip, and other conferences

I spent the last two weeks writing the index for Windows Server 2008 Administrator's Pocket Consultant, 2nd Edition by William Stanek. Despite that, I managed to listen to a few analyst conferences and posted summaries for them. Here's the list:

Akamai, AKAM, October 28, 2009
Cisco, CSCO, November 4, 2009
Dot Hill, HILL, November 5, 2009
Microchip MCHP, November 4, 2009
Maxim Integrated, MXIM, October 29, 2009
Onyx Pharmaceuticals, ONXX, November 3, 2009
SGI November 4, 2009
TTM Technologies November 4, 2009

I missed the NVIDIA analyst conference November 5, 2009, but hope to write a summary of that tomorrow.

Looking at the list, I wonder how I managed to get all that done. Mostly I suppose I know the routine so well that summarizing them takes only slightly more time than listening to them.

If you really want to understand a company, you might look at what the executives were saying to analysts a year or two ago. That would be a good test of how well they are predicting reality as against how much they are just blowing smoke an investors. To see a list of all the companies I do analyst summaries of, with links to all the past summaries I have done for each company, just visit my List of Companies Covered for Analyst Conference Summaries page.