TCS Daily


Tech Commodity Buys Available for Mining

By James K. Glassman - June 21, 2001 12:00 AM

As I write this column, the NASDAQ composite is bouncing around just below 2000. Market gurus warn of a long summer for technology investors. And many analysts continue to note that even though the technology sector has fallen by 20 percent so far in 2001, after an even more horrendous year in 2000, tech stocks are still not cheap. How much worse can it get? Well, if youre looking for doomsday theories, find another column. Im a long-term bull, and Im not about to succumb to a bearish fad.

Its true that many great tech firms still trade at high price/earnings ratios, by historical standards. I believe that in many cases the valuations are justified, but what many of the pundits are missing is that there are also plenty of tech companies that are dirt cheap by almost any standard.

Lets look below the surface of the technology industry to examine the unsung firms that provide crucial components for the digital revolution. Unwilling to buy Cisco (CSCO) when its still valued at roughly five times its annual revenues? Well, how about a tech firm that trades at five times its earnings? Yes, there are a few of them. Kemet Corp. (KEM) and AVX Corp. (AVX) make capacitors, used in abundance in electronic devices from computers to cell phones to microwave ovens. Are these two companies establishing powerful brand names with leading edge technology? Not at all. They make commodity products, which will never be confused with microprocessors. You wont see these companies on the cover of Forbes, and no one will ever refer to their products as the brains inside the PC.

But both companies have been increasing their profit margins in recent quarters, both have an impressive record of rising earnings, and they have good balance sheets not too much debt. By no means do they control their destiny or exercise leadership in technology markets. They ride along with the fortunes of the tech industry, but right now the fare is very inexpensive for shareholders.

Kemet is trading at a price/earnings ratio of about 4, while AVX has a P/E ratio just below 6. Either one could be a good investment for someone who is bullish on technology but thinks the super techs are still too expensive. No doubt, Kemets earnings will fall off this year. Only two analysts cover the stock, and their estimates are for $1 in earnings this year and about $2 next year. Over the past 12 months, Kemet earned about $4. Still, even at $2 a couple years from now, Kemets earnings would mean that todays price (about $18) indicates a P/E of 9. And the earnings estimates could be far too low. As of March 31, the company had $360 million in cash, no short-term debt, and long-term debt of a relatively modest $100 million.

Another passenger on the technology gravy train is Arrow Electronics (ARW), which distributes computer products and components worldwide. Again, not a creator of innovative products, but a major player in distribution, its potentially attractive as a conservative bet on the continued growth of information technology markets. Sales have doubled in four years to $13 billion, and while analysts expect profits to fall this year, the P/E today, based on expected earnings for 2002, is in single digits.
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