CSFB Report on LAM on the current earning release.
I thought their analysis was on a conservative side and
they still came up with $65 target price. I believe that
$3 EPS is possible this fiscal year and $75 for a target
price seems to be a good number.
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research Americas
U.S./Semiconductors/Capital Equipment
BUY
MID CAP
Lam Research(LRCX)
Rebound Gaining Momentum As Tight Cost Controls Magnify
Operating Leverage
Summary
Q4 F99 a Positive Surprise 38% Sequential revenue growth, a solid
1.21 book/bill, and 43% variable operating margins contributed to a
powerful EPS recovery in Q4, to $0.28 per share.
Solid Bookings Prognosis Buttressed by initial acceptance of its CMP
polisher and etch inroads into Asia, sequential order growth may be
posted over the next two quarters.
Sequential Revenue Ramp May Slow In Q2 Before Re-accelerating In H2
Some acceleration in deliveries into the current quarter may slow
top line growth in Q2, but this would only be temporary.
Margin Gains Keyed To Volume, Mix, And Spending Mix and volume are
apt to be margin enhancers in H1:00, though discretionary spending
will need to be boosted.
Price Target Mkt.Value 52-Week
07/29/991 (12mo.) Div. Yield (Billions)Price Range
USD 46 $65 Nil $1.9 $8-52
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
6/01E 3.40 2.80
6/00E 2.70 1.65
6/99A (1.43)
Sept. Dec. March June FY End
F01E $0.79 0.88 0.85 0.88 June
F00E 0.51 0.62 0.73 0.84
F99A (0.70) (0.64) (0.37) 0.28
ROIC
Total Debt (6/99) Nil
Book Value/Share (6/99) $10.00
WACC
Debt/Total Capital (6/99) Nil
Common Shares 40.9MM
EP Trend2
Est. 5-Yr. EPS Growth 18-23%
Est. 5-Yr. Div. Growth NA
1On 07/29/99 DJIA closed at 10,791.3 and S&P 500 at 1,341.0
2Economic profit trend NA = Not Applicable NMF = Not
Meaningful
LRCX is a leading manufacturer of etching systems and an emerging
supplier of chemical mechanical polishers to the semiconductor
industry
Investment Summary
LRCX is rated Buy. We are raising our price target by $15 to $65,
and F00 and 01 EPS projections to reflect the combined plusses of an
improved order outlook which will translate into higher revenues.
With operating leverage magnified by tight spending controls, EPS
are poised to rebound sharply this F4. As LRCX begins to pay taxes
next year, comparisons will stiffen though a solid year-over-year
gain is envisaged.
Q4 F99 - Way ahead of plan
The combined plusses of vigorous new orders (up 15% sequentially)
and some customer induced delivery accelerations allowed LRCX to
grow Q4's top line by 38% sequentially, to $211MM. As in prior
quarters, the bulk of the incremental order and revenue growth was
from the etch product line, which has stabilized and selectively
regained momentum in key accounts. Penetration into Japan,
accounting for roughly $35MM of Q4's estimated $255MM in bookings,
was impressive and may have been LRCX's largest order quarter ever
in that region. At 48%, variable gross margins were restrained by
two key factors: 1) the accelerated production ramp boosted
expedited materials costs and led to inefficient factory scheduling,
and 2) between 10-20% of Q4's revenues were unusually low margined
business booked during the bottom of the cycle. On the plus side,
discretionary spending was held sharply in check, with restructuring
savings offsetting higher commissions, and R&D spending growth
limited to just 6% above Q3's level.
Solid bookings prognosis
Beginning in the current quarter (Q1), LRCX will begin to record
orders for and revenues associated with its CMP polisher. This will
add a new dimension to LRCX's portfolio, and add to H1 bookings.
Q1's order outlook is solid, dominated by North American and Taiwan
foundry demand, while Q2's upside may be keyed to another round of
investment by Korean DRAM manufacturers. There is a possibility of
an acceleration in Korean orders that could lead to some temporary
flattening in sequential order growth early in CY00. For this FY
(F00) we look for bookings to rise by 50%, to a $1.1-1.2B level.
Revenue ramp to follow orders
Just as Q3's 42% order uptick led to a 38% lift in Q4 billings, so
too may Q1 billings growth on a sequential basis match that of the
prior quarter's order growth, estimated at 15% or so. In both Q1
and Q2, we have allowed or roughly two CMP revenue shipments, with
upside possibly in Q2. LRCX exited F99 at roughly an $845MM
annualized sales rate, and we look for this to grow to nearly $1.2BB
by the end of Q4:00, with further upside next year.
Margin matrix is complicated
Q4's discretionary spending curbs will have to be loosened in order
to support growth and new product development, though management's
bogey of capping discretionary spending below 30% for sales (vs.
32.5% in Q4) at a $275MM quarterly sales level lends upside to
operating margins. The key is gross margins. At 39%, there is
plenty of upside. Improved pricing in the backlog is a percentage
point plus to gross margins in Q1, with volume adding another 50
basis points. New production hires in manufacturing and service, and
the ramp of the CMP polisher and new oxide etcher are all potential
margin depressants. LRCX must continue to reduce manufacturing
cycle times and parts costs if 45% gross margins are to be surpassed
in this cycle.
Tax holiday continues through F00
Upwards of $70MM in net operating loss credits will leave LRCX's EPS
untaxed this year. With benefits essentially consumed by mid-F01,
LRCX's tax rate is apt to jump to 25%, stiffening reported EPS
comparisons. This year's estimated EPS of $2.70 on a full taxed
basis would be closer to $1.90, while F01's $3.40 projection has a
near-normal tax rate.
Valuation has upside
On a full taxed basis, CY00 EPS of $3.25 would be closer to $2.60,
and valuations may be predicated on the lower number for
conservatism. Allowing a 110% relative P/E, which pays a premium for
the highest operating leverage of any company in the industry ($0.55
per share per $100MM in sales), a $65 target price can be justified.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within the
last three years, served as a manager or co-manager of a public
offering of securities for or makes a primary market in issues of
any or all of the companies mentioned.
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
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