Y2K Was Just Practice for the Year 2001
You, dear reader, have a great advantage over me. I am writing this in the waning days of the year 2000, in a period of gloom. Yet I will dare to forecast better days ahead-at which time I shall be either a villain or a hero.
Two statements of fact will serve as my introduction:
1. When Amkor said goodbye to a stock price of 60 at the beginning of May 2000, it was an over $2 billion IC packaging assembly, test and fab company whose sales had grown about 26 percent compared to the same period in 1999.
2. When Amkor descended to $12/share on December 21, 2000, it was a $2.5 billion company whose 3rd quarter sales had grown 29 percent.
In both periods, net income increased at far more than twice the rate of revenue. (We might have chosen ASAT, ASE, SPIL, STATS or other IC package assemblers to tell the same story, but Amkor is the largest, and has become the industry's model.)
Some people say that the stock market, over time, is smarter than you and me. What does it know that we don't?
Are the extreme excursions in Amkor's stock price from 12 (July 1999) to 60 and back again telling us something?
Driven by Human Emotions
Well, consider that you could have bought a share of Amkor for $3 in the gloomy days of the Asian Contagion in October 1998. So it's obvious that the stock market exaggerates, and that's because it is driven by human emotions.
At 60, Amkor was selling at a price to earnings ratio of 70. The stock's $60/ share was not a rational price. If earnings increased at a 50 percent rate for 10 1/2 years, the incremental cumulative earnings would finally equal 60. Even the stock market isn't smart enough to see 10 years into the future, let alone predict such a high growth rate.
At 12, Amkor sells at a P/E of 13, irrationally low for a well-performing company leading an industry with great prospects. A P/E of 20 assumes that some day a company may pay something like a 5 percent dividend.
But if Amkor's earnings increase at a reasonable 20 percent per year for the next 5 years, the incremental cumulative earnings would be more than twice the nominal price. So if the nominal price were about 20 for a P/E of 20, Amkor deserves a market price of 40 and a P/E of 40, based on current earnings of about $1/share.
(Insiders thought that 40 was a fair price; that's where some of them sold.)
Greed on the Upside
Bipolar human nature forces the stock market exaggerations. It's greed on the upside-some in the form of short covering (greed coupled with fear), then fear on the downside, augmented in December by tax losses taken.
Every boom carries the seeds of its own moderation-in a period of expansion, or destruction-in a period of decline.
The boom that crescendoed in mid-2000 was the former kind. It led to shortages, distortions and temporary inventory gluts. It told us that PCs have saturated the easy markets, but a new generation will meet the needs of world markets waiting to be served.
A new generation wireless phone will obsolete the entire stock. IP switching networks for voice and data will replace last century's telephone plant. Consider that we've only begun to see the productivity enhancements of inter- and intranets.
Here's one leading indicator that underscores my beliefs: Prototype printed circuit companies, including Dynamic Details and TTM, are loaded to the gills, working between Christmas and New Year's.
So am I (loaded with work, of course!).
Harvey Miller is a partner in Kirk-Miller Associates, Palo Alto, Calif., creators of the FABFILE database of printed circuit fabricators. Both Innovex and STI are listed in FABFILE. [email@example.com]