The Paragon of Precision

RUTHLESS COMPETITION FORCES SEMICONDUCTOR FAB SUPPORT, IN SEARCH OF QUALITY, TOWARD AUTOMATION.

It's almost incredible to think that the highest of the high techs--the semiconductor industry--has fallen behind in automation. But as precision and quality control have become objects of worship in an era of computerization and ruthless competition, chip makers are upgrading, offering an opportunity for money managers to realize the growth potential and value of well-selected fab automation plays.

In the involved process of making semiconductors, many of the steps executed by people are complicated and dangerous. For the sake of precision, cleanliness and safety, there's good reason to program and robotize the fabrication of silicon wafers and finished semiconductors, and good automation can squeeze an extra margin of productivity out of the fab plant.

Over a hundred different manufacturing tools can be part of a semiconductor fabrication plant, and getting automation equipment to mesh with that much diversity can be difficult. Asyst Technologies (ASYT) makes portal equipment that moves the wafer into any number of different machines, each of which can do part of the job of patterning the wafer. Edward White of Lehman Brothers gives the company his highest rating of buy. Over the next several years the industry will transition from eight-inch (200 mm) to the newer, cost-saving 12-inch (300 mm) wafers. "You'll get twice as many chips--perhaps more--out of the 12-inch," says White.

PRI Automation (PRIA) builds equipment that can move wafers from one machine to another within the same plant. The company has also developed software that schedules and tracks wafers through the manufacturing process. White likes the company, although it stumbled over difficulties with the transition and subsequent supply of a product. "But it's a good opportunity," he says. "I actually believe PRI's business is accelerating--demand is quite strong."

Mark FitzGerald of Banc of America Securities rates Brooks Automation (BRKS) a buy. He says the company has the best-positioned product line for both hardware and software in the automation space. Over the last year and a half, Brooks has made software acquisitions that make a difference. FitzGerald believes the company's close working relationship with Samsung presents an unusual opportunity for Brooks to demonstrate its considerable capabilities in software, which is now accounting for one-third of the company's business. More than 100 licenses of its AutoSimulations Productivity Family (APF) software suite were recently sold, and at least seven of the world's top 10 semiconductor companies use APF.

Automation is the necessary competitive opportunity that semiconductor companies need.

Modern semiconductor capital equipment companies supply not only chip manufacturers but also equipment companies--a whole new industry purely focused on selling devices like power supplies, vacuum measurement and gas control systems as well as specialty lasers. In many cases these systems are incorporated into equipment that is then sold to chip makers.

The number one company in power supplies is Advanced Energy (AEIS). White calls the subsystem manufacturer a value and rates it an outperform. He says more and more companies are looking to Advanced Energy to provide not just power supplies but entire packages and modules. "Advanced Energy is a big beneficiary of this outsourcing trend." White says that after an incorrect demand projection in the second quarter, the company is now back on track with strong OEM demand.

With approximately 80% market share worldwide, Cymer (CYMI) is the leading manufacturer of laser systems--the light sources--that go into photolithography equipment used to produce images of microelectronic circuits on each chip. White rates the company a buy. He says the growth driver here is that, with everyone trying to make things smaller on chips, you must have a more complex photolithography system, which in turn requires a more complex light source. "That's what Cymer provides."

During the process of manufacturing semiconductors, gases are used to react with and clean the layers on the silicon. MKS Instruments (MKSI) is the leading supplier of vacuum measurement components and gas flow instruments. Providing the broadest line of instrumentation for that purpose, MKS can solve numerous problems that other companies can't or won't tackle. White rates the company an outperform.

Semitool (SMTL) is a small-cap front-end company that makes wafer fabrication equipment of two types: The first is wafer preparation tools for cleaning the surface of the wafer and the second is equipment for electroplating, an important new technology expected to grow rapidly this year. Sue Billat of Robertson Stephens says the company has an attractive valuation, rating it a buy. She says Semitool is well positioned to benefit from the strong demand for copper electroplating equipment, advanced 300 millimeter wafer cleaning solutions and advanced packaging applications. In order to enhance chip performance, the industry is moving to replace the chips' aluminum microwiring with copper.

Speaking of copper, Billat mentions Rudolph Technologies (RTEC) as one of her favorite stocks. She rates the small-cap company a buy. Rudolph Technologies makes equipment to measure the thickness of the multi-layered films that make up the integrated circuits on a chip. Billat explains that making an integrated circuit on a chip is like making a very complicated layer cake with layer upon layer of various materials that become the circuit. The company determines the thickness of the film's copper by measuring the echo of sound waves created by a sonar type of laser system.

Photronics (PLAB) has developed a sophisticated technology that can make light behave in a way to print smaller and smaller images. Billat rates the company a buy. Trained as a physicist, she explains: "Now they can actually print something smaller than the wavelength of the light they're using to produce the image. That was thought to be impossible before." Not only can it be done, but the industry can now do it in high-volume production.

In addition to telecommunications and electronics component testing equipment, Keithley Instruments (KEI) offers solutions for monitoring semiconductor wafer processing. Rating the company a strong buy, Joe Noel of Pacific Growth Equities is most impressed with the conservative nature of company management. He says costs are under control, and there's been a beautiful progression of increasing operating margins for the past several quarters.

Cognex (CGNX) provides machine vision-based inspection and guidance equipment for silicon chip manufacturing as well as general and pharmaceutical manufacturing. Alexander Paris of Barrington Research Associates rates the company a strong buy. He says the drive for quality and zero defects is now an entrenched part of the new industrial revolution because people have found out that the best way to be a low-cost manufacturer is to produce only high-quality goods without a lot of waste. "You can't make a semiconductor anymore without machine vision because you can't inspect what you can't see."