Cabot Microelectronics Corporation: Long-Term Investors Should Wait For The Right Price
Cabot Microelectronics is benefitting from firm demand from semiconductor manufacturers, which uses its consumable slurries and polishing pads in the process of producing advanced integrated circuit (IC) devices. Demand has remained strong since mid-2016, driven by increasing semiconductor wafer starts and the increasing complexity of IC devices, especially with the industry’s transition from 3D NAND flash memory from 2D NAND. For the next two years consensus expects the company’s revenue growth at 14.6% and 9.4% respectively, with implied gross margins of 52.0% and 53.8%, and implied EBIT margins at 27.1% and 28.9%. While the outlook for semiconductor industry growth remains strong, past history suggest this high near-term growth is likely to slow at some point. Since 2003 revenue growth for the company has averaged 5% annually, gross margins 48%, and EBIT margins have averaged 16%, though there have been several periods of big swings up and down during that time. Our multiple scenario DCF price target for CCMP is $103, so the stock is already fairly valued at the current level. The stock is attractive on a multiple basis relative to its one-year trading history and relative to Technology stocks in general, but the risk/reward is only suitable for short-term investors that can rebalance their portfolios fairly often. On any hint that of a possible shortfall to consensus or a general industry slowdown the stock could very quickly sell off by -10% or more.
Cabot Microelectronics supplies polishing slurries and pads used in the manufacture of integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). The company develops, produces and sells CMP slurries for polishing many of the conducting, insulating and isolating materials used in IC devices, and also for polishing the disk substrates and magnetic heads used in hard disk drives. In addition, the company develops, manufactures and sell CMP polishing pads, which are used in conjunction with slurries in the CMP process. The company also pursue other surface modification applications through its Engineered Surface Finishes business.
J. Stephen Castellano founded Ascendere Associates LLC to provide innovative equity research and investment advisory services that blends fundamental and quantitative approaches.
In general, our approach is quite simple -- we believe that return on invested capital and long-term earnings growth are key to stock valuation. More specifically, we use powerful and unique financial models that combine publicly available data, consensus estimates and our own inputs to generate consistent and actionable stock recommendations.
Among the services that Ascendere provides are: 1) detailed custom equity research analysis; 2) valuation scenario analysis studies; 3) long/short model portfolio strategies; 4) long and short idea generation; 5) portfolio feedback; 6) detailed fundamental financial modeling services; and 7) additional analytical consulting services. Recent financial modeling consulting clients have included several notable startups as well as BCG Platinion, the risk management division of Boston Consulting Group.
Mr. Castellano has over 20 years of experience in equity research and related consulting work. At PaineWebber, Warburg Dillon Read and Credit Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at Babson College (2005) and a BA from Oberlin College (1993).
Mr. Castellano's career history is highlighted below:
- Ascendere Associates, LLC (2009-Present)
- Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)
- Pyramid Research, Contract Consultant, Telecom Services (2002-2003)
- Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)
- Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)
- PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)
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