Speculation Observations: Mattson Technology (MTSN)

Mattson Technology (MTSN) is a supplier of equipment to Semiconductor producers (i.e. Intel). Some of their competitors are Applied Materials (AMAT), Lam Research (LRCX), and Novellus (NVLS). These are 2 billion dollar plus companies versus 130 million dollar company. Market cap doesn't tell me anything about valuation of the company so I would ignore that figure for now.

Macro View

When economy recover, people feel better and they go out and buy computer from the suppliers like Dell or HP. These computer suppliers then have to ramp up production and order more computer chips from Intel or Samsung. A demand surged triggered Intel to boost production buy expanding their production capacity by buying more tools from the likes of Applied Materials or Mattson. This is what happened when the economy recover.

Market Exposure

In 2008, 19% of the revenue came from Canon and 10% came from Samsung (from 2008 Annual Report). With 90% of their revenue comes from over sea, this company is truly international. The largest market they served is memory which is estimated to be around 70% of their revenue. As you may realized from going to Fry's or Best Buy and see USB sticks sell for nothing, it's appropriate that this market has seen a fair share of margin contraction (lower profit). This may be the reason why share price of Mattson and its competitor who are exposed to memory got cut in half.

Valuation

Mattson is currently trading at $2.50 to $3.00 range. They hold $1.56 cash per share and $2.24 book value. As a result, you have a tech company with NO DEBT trading at roughly 1.2x book value. That fits Benjamin Graham's formula. Tangible book value (this exclude IP value) is at $3.16 at the end of 2008. Because the company has a negative earning and doesn't pay dividends, we can only assess valuation based on book value. Using Morningstar valuation tool, you see that over the prior of 10 years, the average trough book value is 1.2.

Some of the things I am concern about are negative earning for this year and the next, possible burn in cash flow, and market liquidity issue. The company traded as high as $11.76 in 2007 then dropped to $0.30 in 2008. Assumed that you bought at the low and sold at $2.50, you would have gained 700%+ on your money. Such valuation and price will probably not likely because the credit market returned. Even at $0.30, no one was willing to buy a company with tangible book of $3.00.

So how do I come up with a fair market value for Mattson? Simple calculation based on Dow Theory suggest a fair market price of $6.03. The calculation is simple, take the peak price of $11.76, plus the absolute low of $0.30, then divide it by 2. That's the fair market value based on the Dow Theory interpretation. The chart below shows longer term

What You Need to Buy?

If you plan on buying Mattson as a speculation, here are things you need.

• Strong and Healthy Heart for the up and down market. Don't be surprise if price fall to $1.50 range.

• Money you can "throw away". This is speculation at best so make sure you can lose it and still be ok.

• Time. This company will need time to work and so will you. Price will not revert to $6 simply because I wrote about it. The market will decide that.

Once again, this is a deep end of the speculation pool. I've selected a stock that I believe has a lot more room on the upside but downside may be hidden. Please do your homework and manage this speculation wisely.

Art

Disclosure: None

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