NVLS upgraded!
10:25am EDT 6-Aug-99
SoundView Financial Group (Michael O'Brien, 415-217-5516)
Novellus Systems (NVLS) - Upgrade
Novellus Systems (NVLS) $56.07 Buy Aug. 6, 1999
(FYE Dec.) F97A F98A F99E F00E Curr. Last Yr. Ago
Revenue ($M) 534.0 518.8 547.1 765.0 145.0 130.9 106.7
EPS 2.17 1.51 1.58 2.90 0.46 0.31 0.22
* Novellus has seen a significant decline in share price, as the company works
through some execution issues for its current products.
* Several factors are affecting the company currently: loss of market share in
HDP-CVD, copper migration not being as quick as the company hoped, and a less
than robust start of the company's barrier/seed product.
* Given the current share price, we view the downside risk as small currently.
The company will likely address the outstanding issues and can once again
execute to historic norms.
* When we can uncover a change in momentum, we would become more aggressive on
the shares. We currently continue to rate the shares a buy.
Novellus continues to be plagued by execution issues.
While the semiconductor equipment group has generally been treading water over
the last few weeks, Novellus continues to be impacted negatively. In our view,
the company is not executing to the degree that people expected on that the
history of the company has shown to be the norm.
High-density plasma CVD (HDP-CVD) appears to be losing market share at the
moment, but we expect it to be a viable competitor going forward.
High-density plasma CVD (HDP-CVD) has been the fastest growing of the CVD
segments as it is a requirement for current advanced interconnect structures.
Novellus' Speed tool had a dominant market share in HDP-CVD early on as Applied
Materials first generation tool stumbled. However, the Ultima tool from Applied
has proven to be very successful in the market place, as it was the first to
offer a fluorine doped insulating film and provides the remote chamber clean
technology. The Novellus tool has begun to ship with the ability to do fluorine
based films which should help. Additionally, we believe that the company has
worked to address some consumable parts issues on the tool. Therefore, while
the market share for HDP-CVD could tilt significantly in Applied's favor in 1999
(65-70% share), we believe that Novellus will have the opportunity to gain
share back in 2000. Part of the share skewing is due to the large order that
Applied received for HDP-CVD from Intel for 1999 delivery.
Other areas of dielectric CVD appear to be doing well.
The company's other dielectric CVD tools appear to be seeing continued success
in the marketplace and its new Sequel Express could prove to be a winner. In
our view the new low-k films, CORAL, are quite compelling and may provide a
boost to the growth stream. The company continues to be a leader in the blanket
deposition film area.
The company continues to work for a big win with its PVD tool
Novellus has been attempting to penetrate the PVD market with its Innova tool.
The major area of focus is for the barrier and seed layers needed for copper
production. In our view, the company has about 10-15 tools in the field where
it is in evaluation. We believe the company is still looking for a big
multi-unit win to gain credibility and differentiability for the tool. Intel is
perhaps the most widely speculated place where the company is trying to
penetrate. From our vantagepoint, we believe that the decision is still
several months away, and we would put the maximum percentage that Novellus would
get of the business at 30%. In actuality, we believe the percentage could be
smaller than that. However, any win would be great for Novellus, as the
barrier/seed portion of copper metalization is estimated by us to represent
about 70% of the revenue opportunity for the metalization of a copper fab.
Overall, copper adoption is not as rapid as the company hoped.
In our view, the migration to copper is seeing a lot of evaluation work and
companies' roadmaps have definitive plans for copper. However, we do not
believe that the ramp to copper processing is as rapid as Novellus would have
liked or hoped. This has also given Applied Materials the opportunity to
release its electroplating tool for copper fill. We believe that Applied has
released a quite competitive product, and the battle will be a significant one.
The key wins that Novellus has to date for electroplating include Intel and
IBM, although Intel will not be ramping for production for a year or so. The
IBM opportunity is also not without risk, as we believe that Applied Materials
could be attempting to make a breakthrough there.
The longer-term outlook remains bright.
Novellus has always had one of the premier financial models in the industry, and
we expect this to continue. The company enjoys some of the highest gross
margins of any equipment company, as it recognized early on the advantages of
outsource manufacturing. We are quite confident that the company will remain
one of the technology leaders and one of the stars of the equipment industry.
However, the company is currently not executing to the level that we would
normally expect.
The stock decline makes it much more attractive but we still are looking for a
momentum change in fundamentals.
Based on the 25% correction that the stock has currently undergone, we view it
now as starting to move close to a level where our interest picks up
considerably. However, we still believe we need to see a change in the
fundamentals and a sign that the company has regained a upper hand in some of
the product run-offs it currently has underway. Therefore, we continue to rate
the shares a buy. Our view is that the likely additional downside could be
about 10% from here. Our 12-month price target remains $88 and we believe that
the longer-term continues to be bright.
This report is based on information believed by us to be reliable. No
representation is made that it is accurate or complete. This report is not an
offer to buy or sell or a solicitation of an offer to buy or sell the securities
mentioned. SoundView Technology Group, Inc., and others associated with it may
have positions in and effect transactions in the securities mentioned or
related options. SoundView Technology Group, Inc., may make a market in the
security or securities listed herein and may also perform or seek to perform
investment banking services for those companies. Do not change or reproduce
this report without the express written consent of SoundView Technology Group,
Inc.
First Call Corporation - all rights reserved. 617/345-2500
|
