Markets, as everyone knows, hate uncertainty, but yesterday morning brought some respite to traders across the world. At least one geopolitical powder keg, the one that has raged in our region for an entire month and which has been rated as highly dangerous to world peace, has been put out for now.
The Japanese market, which precedes markets in the West, welcomed the news and the Nikkei is once again powering upward to the 16,000 point level, after tumbling below 14,000 points during the war. Trading in futures in New York signaled optimism, although this could all rapidly change since dealing rooms can become war rooms in an instant.
The geopolitical front will not remain idle for even a minute, since as everyone knows there is no shortage of troubles in the world. The focus this week will probably shift back to the airborne terrorism threat that surfaced in London last week, threatening economies across the globe. This issue will retain top slot on the news, at least until the 5th anniversary of the September 11 attacks in New York.
Iran, which has temporarily dropped out of our own news items, will also be back on the agenda this week with regard to its nuclear arms program, as the international community continues to await that country’s response to its carrot and stick proposal. The nuclear threat posed by Iran has become much more tangible than it was a month ago, as the world internalizes the fact that a country which is capable of firing 4,000 conventional missiles at its neighbors is also likely to fire a nuclear missile at some point in the future.
Smart analysts will tell you that now is the time to deduct the cost of the upcoming slump in the chip sector from stock prices. Exactly which slump are they talking about? Yesterday, for example, a really “bad” figure appeared in the news. The total volume of chip equipment sales worldwide rose by no less than 50% in June, compared with 2005. Fine, say the analysts, that’s history and the future looks bleak. Anyone who wishes to find what the future holds can do so by examining the orders backlogs of equipment companies, since these are the figures that will power sales in the coming months.
It was also announced yesterday that the rate of orders for chip manufacturing equipment worldwide increased 90% in June, compared with 2005. Those analysts who have been waiting a long time for the recession to begin in the chip sector, which is known for its cyclical tendencies, say that it will be relatively short, compared to the ones we saw in the past. They add that, unlike previous occasions, it will not cause the sector’s companies to post heavy losses.
In any case, which companies are ordering that much chip manufacturing equipment these days? As usual, the growth engines are apparently the mobile handset, media player, and thin television screen markets among others, whose production food chain leads back to the equipment manufacturers, the largest of which is Applied Materials Inc. (Nasdaq: AMAT). Against this background, Applied Materials is set today to report sales totaling $2.5 billion for the July quarter, a 50% increase on 2005, and earnings per share of $0.30, double its earnings last year. As usual, the stock will respond primarily to the company’s guidance and expected increase in its orders backlog.
The announcements made earlier this month give some indication of the investments in this field. SanDisk Corporation (Nasdaq: SNDK) CEO Eli Harari, M-Systems Flash Disk Pioneers (Nasdaq: FLSH) president and CEO Dov Moran and managers from SanDisk’s partner Toshiba (TSE: 6502; LSE: TOS; XETRA, AEX, Paris: TSBA), dedicated a flash chip manufacturing plant in Japan at an investment totaling billions of dollars.
I am convinced, however, that equipment orders have already been signed and given to Applied Materials and others. Even our own Tower Semiconductor (Nasdaq: TSEM; TASE: TSEM) is probably making frantic phone calls to its equipment suppliers requesting that they “hurry up with the equipment deliveries as the missiles have stopped falling here,” after it recently received money and more orders from SanDisk.
In March 2006 Omrix Biopharmaceuticals Ltd. (Nasdaq:OMRI) wanted to float at prices of $15-17, but owing to market conditions, it had to settle for $10 in April in an IPO led by CIBC World Markets and UBS. I am now adding Omrix to my portfolio in place of Radware (Nasdaq: RDWR; TASE: RDWR), which looks to me like dead money in the interim future. Omrix’s fantastic results from last week, explain why it had the cheek to try from the outset to float at prices as high as $17.
After the Pharmos Corp. (Nasdaq: PARSD) fiasco, it took me some time before I could bring myself to check out more biotechnology companies with great promises. The key issue that I did not to want to compromise on was profitability since I have had enough of biotech companies with heavy losses and grandiose dreams.
Omrix is registered in the US, but is based in Israel, where it develops and manufactures biotechnological products for operating theaters in a field known as hemostasis, or control of bleeding. It came to fame at the end of last year with a product described as a “surgical sealant”, which some people hoped could be of help to former Prime Minister Ariel Sharon when he was hospitalized after suffering a massive stroke accompanied by internal bleeding.
CIBC, which has given Omrix a buy rating (“Sector Outperform”), raised its forecasts for the company following its second quarter results, and set a target price of $21, 65% above its current market price of $12.85. Omrix posted earnings per share of $0.42, more than double CIBC’s forecasts, due to higher than expected sales and gross profit. CIBC also raised its earnings per share forecast for 2007 to $1.57, which means that the share is currently trading at the ridiculous multiple of 8, with growth in 2006-2007 expected to be in excess of 50%.
With figures like these for a growing and highly profitable biotech company with an interesting product pipeline awaiting approval and partnerships with big companies, I am convinced that institutional investors will arrive sooner or later. Once they come on board, Omrix’s price will head back to the range that its underwriters originally aimed for when they led the issue - $15-17.
Published by Globes [online], Israel business news - www.globes.co.il - on August 15, 2006
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