Happy Halloween from Condor Monthly! In this issue, I will share a bit about a conference I recently attended and discuss with you our positive feelings on KLA-Tencor (KLAC). In our financial planning article, we address the financial concerns surrounding divorce.
What's New at Condor Capital
During October, I spent three days at a semi-annual Council of Independent Financial Advisors (CIFA) conference in Santa Fe, New Mexico. This group, which I helped establish 11 years ago, provides a forum for independent financial advisors to meet and discuss the wealth management industry. Open only to principals of investment management firms, these meetings provide an invaluable venue to share and learn from peers. Topics range from the current state of the markets to how best to address individual client's needs through proper financial planning. I always feel that I walk away from these meetings having learned something that will assist Condor Capital in providing our clients with the best possible service.
From the Portfolio Manager
KLA-Tencor Corporation (KLAC)
About KLA-Tencor:
KLA-Tencor is "who you're gonna call" when it comes to rooting out and fixing flaws in computer chips. The company offers yield management systems that monitor and analyze silicon wafers at various stages of chip production, inspecting reticles (which make circuit patterns) and measuring crucial microscopic layers of many types of integrated circuits. The systems' feedback loops allow flaws to be corrected before they can ruin entire wafers. KLA-Tencor's systems are used by most of the world's major semiconductor makers, as well as by silicon wafer and data storage product manufacturers. KLA-Tencor has used selective acquisitions as well as intensive R&D to keep up with rapid advances in chip fabrication. The company is the leader in its niche and tries to outmaneuver the competition by developing and introducing products well in advance of their mainstream adoption. KLA-Tencor also seeks to position itself as a one-stop shop for its yield management issues, particularly by complementing its robust technology offerings with industry-leading consulting services.
KLAC occupies a position of market leadership in the compelling semiconductor equipment industry.
KLAC owns in excess of 40% market share in process control/diagnostics and over 70% market share in some of the smaller segments in which it competes. Competition from Applied Materials (AMAT) and Hitachi (HIT) has been intensifying; however, KLAC's superior technical expertise, product portfolio, and defect database should ensure its continued dominance.
KLAC's major market is process diagnostics. This market segment of semiconductor equipment represents more than 75% of the company's annual revenue. The company's tools are primarily used to monitor and inspect wafers (silicon on which transistors are etched) for various defects that could limit yield (the amount of finished product a fab delivers to the market). What is particularly compelling about this industry is the fact that this segment of semiconductor equipment spending is growing at an impressive pace. As fabrication processes become more and more complex (i.e. manufacturers pack more transistors onto chips), yield issues become more of a concern. As such, semiconductor manufacturers are willing to pay more for diagnostic equipment that will cut down on defects. Miniaturization has been the primary driver of performance gains in the microprocessor industry and this trend (and Moore's Law) will likely continue to endure for some time to come.
Although top-line growth may slow in '06, margin expansion won't.
New product launches in upcoming quarters should drive average selling prices in the right direction, especially as new fabrication facilities open up in desirable areas such as India and China. Additionally, KLAC has simplified its product portfolio into 6 platforms (from 15), which is estimated to cut various sales and manufacturing costs by 20%-30%.
Accelerating technology nodes should be a boon for KLAC.
Semiconductor equipment is certainly a cyclical industry, but the cycles have become shorter and less severe in recent years. Stronger competition between Intel and AMD has decreased the life cycles of many manufacturing technologies and next generation fabrication capacity is being ramped up earlier and earlier. Perhaps most importantly, KLAC's business opportunity at each "technology node" increases by about $50 million. Generally, each time the semiconductor manufacturing process becomes more complex, KLAC has the opportunity to earn more revenue per fabrication facility that it outfits with its yield management products.
Management remains the best in the business.
KLAC's management team has always been regarded as one of the best teams in the business and was recognized by Forbes last year. KLAC shareholder value has remained stable while the number of new fabrication facilities opened has declined from 27 per year in the 1990's to 19 per year over the last few years. For these reasons, we believe KLA-Tencor is a suitable long term investment in the technology sector.
Financial Planning Corner
Staying Afloat During a Divorce
If you're going through or contemplating a divorce, you're probably struggling with numerous financial issues while riding one wave of emotion after another. However, if you focus on your finances now, you may find it easier in the long run to navigate your way through one of life's most difficult transitions.
First things first
You'll need to know the divorce laws of your state. It's a good idea to consult a divorce attorney who can help you understand the divorce process and prepare for it. Here are some essentials you might want to think about before meeting with your attorney. If you have children, what are your wishes regarding custody, visitation, and child support? What will your spouse want? Currently, most states require courts to determine custody on the basis of the children's best interests, without regard to the gender of the parent. As a practical matter though, very small children often end up with the mother. When a divorce occurs, the noncustodial parent is usually ordered to pay child support to the custodial parent. The amount of child support can simply be a matter of agreement between you and your spouse or a judge can order it. All states now have child support guidelines that help the court decide the amount of child support to be paid.
What do you want to happen to the family home?
Will your spouse agree? In many divorces, the family home is the most valuable asset. Is it financially possible for one of you to continue living in the home, while the other incurs the expenses of a new household? Is it more practical to sell the home? Can one of you buy out the other? If children are involved, there are nonfinancial considerations, but try to separate the emotional aspects from financial ones.
How do you want your assets divided?
Gather all your important financial records and tax returns. Don't forget the deeds to any property you might own, and copies of loan agreements on any assets you've financed. Consider, too, making an inventory of all valuables. The division of your property will eventually be reduced to a written agreement called the property settlement agreement. Once both parties have signed, the agreement is binding and becomes part of the divorce decree. In general, both spouses are responsible for any joint debts incurred during the marriage; it doesn't matter which party actually spent the money. When property is divided at the time of divorce, the person who gets the asset typically gets the responsibility for paying any indebtedness secured by that asset.
Some dos and don'ts
- Don't forget about your need for health insurance--you may be able to obtain temporary coverage under your spouse's plan
- Do work with a financial professional to project future needs
- Don't let your emotions get in the way of your common sense
- Do consider the need for life insurance on your spouse if your future income will depend on him or her
- Don't make spontaneous purchases or create additional debt that might later cause financial hardship
- Do make the necessary changes to your insurance policies and your will, and continue saving for your retirement
Hard as it is to imagine, you will eventually put the turmoil of the divorce behind you. For now, though, the important thing is to hold a steady course until you find yourself on solid ground again.
