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Standing Tall In The Chip Slump?

Inside Wall Street


Semiconductor shares have been under such heavy pressure that some investors think they're ripe for recovery. But instead of putting his money on memory-chip makers, money manager Scott Black is betting on KLA Instruments (KLAC), the world's leading maker of equipment and process-monitoring systems to test chips' quality and yield.

Despite concerns about overcapacity in semiconductors, Black, president of Delphi Management, thinks KLA is in a good position to weather turbulence in capital spending in computers and chips. He thinks such worries are already reflected in KLA's stock price, which dropped from 48 last September to 23 on July 1.

The company is flush with cash, has practically no debt, and has a book value of about $10 a share. Says Black: "There's no question that this dominant player has hit a very attractive level." He figures that the increasing cash flow and a steady order backlog will bolster the results this year and next and that the stock will double in 12 months.

Black expects earnings to jump to $2.60 a share for the year ending June 30, 1997, up from an estimated $2.35 for fiscal 1996 and $1.53 in 1995. The Street's consensus for 1997 earnings is even higher--$2.76, according to Zachs Investment Research.

A big boost to earnings, says Black, will come from Korean chipmakers. He thinks they'll hold down production of 16K dynamic random-access memories and switch to more powerful 64K DRAMs. When this happens, says Black, the demand for KLA's services will rev up. If computers start using the new 64K DRAMs, "it will be an entirely new--and bigger--ballgame for KLA," Black says, as chipmakers will need new and even more efficient testing of the new chips.BY GENE G. MARCIAL

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