Prudential started the company with a "strong buy" rating and set a 12-month price target of $30. Shares of Alliance rose $2.44 to $22.06. The stock has traded between $27.62 and $3.34 during the past 52 weeks.
"Alliance is a compelling investment opportunity, given its operational turn-around, its plentiful access to capacity, the value of its equity investments and its potential to unlock the value of its private investments by fully acquiring them and integrating them into Alliance's operations," wrote Prudential analyst Hans Mosesmann
The Santa Clara, Calif.-based company does not own any manufacturing plants but has access to chip production through its equity stakes in several "top-tier foundries," wrote Mosesmann. As a result, it avoids the risk of owning expensive plants.
Mosesmann estimated the company will earn 34 cents in fiscal year 2001, which ends in March, and 55 cents for fiscal year 2002. He forecasts revenues of $170 million in fiscal 2001 and $265 million in fiscal year 2002.
Mosesmann currently values the company at 15 times earnings estimates for calendar year 2001, which is a discount compared to the average valuation of 26 times earnings on similar semiconductor companies.
Alliance, which makes memory chips for PCs and other markets, had $74 million in total backlog at the start of the current June quarter. Prudential believes the backlog should dissipate within three quarters and be completely erased by the end of December.
Alliance also owns equity stakes in Broadcom, Vitesse Semiconductor, Chartered Semiconductor and United Microelectronics. Prudential values these holdings at $1.4 billion and believes they help hedge some of the downside risk of the stock.
The company sells its products to distributors, which account for 36 percent of its sales, and original equipment makers such as Alcatel, Nokia, Lucent and 3Com, as well as Celestica and Solectron.
In the most recent March quarter, 44 percent of sales were domestic, while Europe contributed 38 percent, Asia Pacific counted 12 percent, and Taiwan accounted for 6 percent.