Raising Price Targets For Four Companies, Ratings Unchanged
Salomon Smith Barney
Friday, September 10, 1999
--SUMMARY:----Semiconductor Equipment
Raising price targets for AMAT, ETEC, KLAC, and LRCX due to improved
industry visibility for December and good order fill-ins for the March
quarter.
Believe that orders will trend steadily up in Dec. & Mar. quarters. While
this order increase is already built into the Street expectations, we
expect a multiple expansion as the market expands the discounting horizon
to 18-24 months due to optimism regarding the recovery in semiconductor
industry.
We are moving our trading range boundaries up as a result. Leaving 2H
ratings on AMAT, KLAC, LRCX, and NVLS unchanged.
--OPINION:------------------------------------------------------------------
Raising Price Targets for AMAT, ETEC, KLAC, and LRCX
Following two days of upbeat commentary from the semiconductor equipment
companies that presented at the SSB technology conference, we are raising
our price target for four companies: Applied Materials (2H), Etec Systems
(1H), KLA-Tencor (2H), and Lam Research (2H). However, we are leaving
our ratings unchanged for AMAT, KLAC, and LRCX at 2H, Outperform as our
ratings reflect our medium-to-long term stance. For example, we still do
not have clear visibility on how the traditional seasonality in the PC
sector during the first half of next year will affect orders for the
equipment companies during that time frame and hence, remain slightly
cautious. We still believe the next major driver to orders/sales will
not arrive until the 300mm generation (late 2001/2002). Our price target
change reflects our short-term stance (3-5 months) regarding the current
strength in semiconductor sales, the follow through strength in the
equipment sector, and as a result, the multiple expansion possibilities.
Near Term Visibility Has Improved
Commentary from nearly all equipment companies points to improved
visibility for December and good order fill-in for the March quarter.
While the September quarter is typically back-end loaded, companies such
as Novellus Systems talked about a good order intake during July and
August. However, we would like to mention that none of this improved
visibility points to spectacular upsides but merely modestly up orders on
a sequential basis. Most current Street revenue/earnings estimates for
Applied Materials and Lam Research call for a 3-5% sequential revenue
growth, while those for Novellus Systems and KLA-Tencor factor in high
single digit revenue growth.
The current order improvement is hence a necessary condition for Street
estimates to be met. The question then is what is the right multiple. We
have always been surprised by the quick discounting nature of equipment
stocks. For example, in the third week of February 1999, Applied reached
its peak multiple on calendar 2000 earnings, a full 6-9 months earlier
than in the 1995 and 1997 cycles. If the semiconductor news continues to
be strong without any pauses and with the improving equipment order
outlook (from the last 2 days SSB tech. conf.), we could quite well see
equipment stocks achieve peak multiples on calendar 2001 earnings by
Jan/Feb 2000 - which is only 4-5 months away.
Basing New Price Targets On Earnings Potential in 18-24 Months
While our previous price targets were primarily based on our CY2000
earnings/sales estimates, we are basing our new price targets on an
average of 2000/2001 earnings estimates. This typically leads to a 10-25%
upside from the current levels. Near term, we could see the stocks trade
up towards the high-end of the range due to the excellent semiconductor
outlook and firming of equipment orders for the December and March
quarters.
Leaving 2H (Outperform, High Risk) ratings on AMAT, KLAC, LRCX, and NVLS
Unchanged
Our 2H ratings on these four premier companies reflect our medium-to-long
term stance due to risk/reward issues. We are clearly cognizant of the
fact that quality companies will never be cheap; however, we note that
equipment stocks are cyclical growth stocks. There is a 10-25% reward due
to multiple expansion; however, the risk is also 20-30% in the event of
any airpockets in the current recovery. This risk/reward compels us to
leave our 2H ratings unchanged. We would need to see evidence of 1) new
fab construction, 2) appreciable copper production implementation, or 3)
improved visibility on 300mm order buys to turn more aggressive from the
current stock price levels.
We are raising our price target for Applied Materials (AMAT, $79,
Outperform-2H) to $85 from $76 previously. Our new price target is based
on our expectations for EPS to increase 25-30% from our current CY00
estimate of $2.67 to $3.30-$3.40 in CY01. By averaging the CY00 and CY01
estimates, we arrive at estimate slightly above $3.00 and applying a 28x
multiple results in the $85 price target. Our previous target of $76 was
arrived by using a 28.5x multiple (a 15% premium to the S&P500) on CY00
EPS of $2.67. Instead of our previous expectation for Applied to remain
in the trading range between the low $50s and low $70s, we now expect
Applied to trade between the mid $60s to the mid/high $80s.
We are raising our price target for KLA-Tencor (KLAC, $71 1/2,
Outperform-2H) to $80 from $71 previously. Our new price target is
arrived by averaging the earnings in FY01 of $2.37 and our expectation of
$2.96 in FY02 (up 25% from FY01) and applying a 30x multiple. We are
using a 30x multiple versus 28x for AMAT, LRCX, and NVLS because we
believe earnings are still slightly depressed and see additional room for
upside in gross margins. Our previous price target was $71, or 30x our
FY01 estimate of $2.37.
We are raising our price target for Lam Research (LRCX, $63 3/8,
Outperform-2H) to $75 from $62 previously. Our new price target is
derived by averaging our fully taxed CY00 estimate of $2.37 with our
expectation for CY01 EPS of $2.90 and applying a 28x multiple to the
resulting blended 2000/2001 estimate of $2.68. Our previous price target
was $62, or 25x our fully taxed CY00 estimate of $2.46.
We are raising our price target for Etec Systems (ETEC, $45 3/16, Buy-1H)
to $64 from $48 previously. We believe trends in the photomask industry
are clearly pointing in the right direction and look for increased quote
activity to lead to increased orders. We believe the turnaround is right
around the corner and believe a 4x multiple on our CY00 sales per share
estimate of $16 is now appropriate. We had been more cautious before and
used a 3x multiple (which resulted in a $48 price target) but believe the
improved visibility justifies a 4x multiple at the current juncture.
We are leaving our price target for Novellus Systems (NVLS, $66 ¾,
Outperform-2H) unchanged at $80. However, we are moving away from our
previous price target calculation based on sales per share to an EPS
metric as earnings will no longer be depressed going forward. Consistent
with AMAT and LRCX, we are averaging our CY00 earnings of $2.59 with our
expectation for CY01 EPS of $3.15 and applying a 28x multiple to the
resulting blended 2000/2001 estimate of $2.87 - which yields a price
target of $80.
--------------------------------------------------------------------------
-------------------------------------------
Highlights from Day 2 of SSMB Technology Conference
KLA Tencor (KLAC, $71 ½, Outperform-2H, Price Target - $80)
Key Highlights
1. Orders strength is broad based (MPU, logic, and foundries). The US,
Japan, and Taiwan are strong. Singapore is picking up and Europe is
reasonably strong while Korea is still relatively weak.
2. Orders have picked up in the last 3-4 weeks and the company is
experiencing pull-ins of deliveries. Due to the order strength, we expect
the company to build backlog in September and post sequentially up
orders.
3. Customers are demanding earlier deliveries and KLA-Tencor is
evaluating is 6-month backlog strategy. We believe there are clear
upsides to our sales estimate of $255 million in 1Q00.
4. The company has not yet experienced a pickup in orders from the DRAM
manufacturers. We believe that if DRAM prices remain firm, this
represents another potential area of modest sales/bookings upsides.
5. eS20 is booked solid, strong interest in tool. eS20 is shipping 1 tool
per quarter now but company expects this to ramp to 3 per quarter by the
beginning of 2000. Build time is only 2-3 months.
Presentation Details
1. KLA-Tencor's strategy is to connect all parts of the fab (etch, litho,
film deposition, etc) together with its comprehensive suite of inspection
tools to make it more difficult for competitors to encroach on its
leadership position with point tool solutions.
2. The move to 0.18 micron is a primary driver as the subwavelength gap
at 0.18 micron and below is making it more difficult to achieve
acceptable yields if processes are not operating perfectly.
3. Product line expansion will be driven by acquisitions as it allows for
a faster time to market
4. Copper is another major driver as e-beam detection is essential. There
is currently little industry expertise in copper and learning cycles are
likely to be long which is a boon for the company. KLA-Tencor has a 100%
market share in e-beam.
5. The equipment, cleanroom, and people are becoming less problematic now
and the main source of defectivity is in the manufacturing processes.
Novellus Systems (NVLS, $66 3/8, Outperform-2H, Price Target - $80)
Key Highlights
1. Company is more bullish for 4Q99 and now expects 8% sequential sales
growth in 4Q99 (Dec) from 3Q99 (Sept) versus guidance on the company's
2Q99 conference call of 3-5% growth. Our model calls for sales to grow
7.5% sequentially in 4Q99 to $157 million from $146 million in 3Q99.
2. Orders were strong in July and August and 3Q99 was not as back-end
loaded as expected
3. Expect book-to-bill greater than parity in 3Q99 (September)
4. Optimistic that order strength will continue and that the
semiconductor recovery will continue
Presentation Details
1. 300mm equipment is expected to carry a 30% premium versus 200mm
equipment
2. Move to 300mm will be driven by desire for cost reductions
3. Copper allows for higher performance devices (carry more current,
better electromigration characteristics) and lowers cost by 25% versus
conventional aluminum interconnects
4. PECVD sales are all that is necessary for copper while HDP-CVD is
needed for advanced aluminum devices
5. Novellus' strategy is to gain market share in PVD Al Liner/Barrier,
achieve market leadership in dielectric and metal CVD markets, and
dominate the copper electrofill and barrier/seed markets
6. Long term secular model is as follows: 15% growth in sales/EPS, 58%
gross margins, under 35% in operating expenses (as a % of sales), and 15%
net margins.
Etec Systems (ETEC, $45 3/16, Buy-1H, Price Target - $64)
Key Highlights
1. Company is clearly more optimistic on the recovery as visibility has
improved. 0.18 micron ramp is expected to drive orders/sales over the
next year.
2. July quarter is expected to be the trough in terms of sales/gross
margins. Look for steady recovery ahead, with improving sales/earnings.
Expect sales to improve from $48 million in 4Q99 to $59 million in 1Q00
and EPS to improve from ($0.18) in 4Q99 to ($0.05) in 1Q00.
3. Leading edge capacity (0.25 micron and below) in Taiwan is full, which
is clearly a positive
4. Build times are currently 22 weeks. Etec could possibly ship 1 extra
machine per quarter but not 3. DPMI and PLAB have already placed
multi-system orders over the last 6-9 months to eliminate the risk of not
getting a machine in a timely manner.
5. Backlog at year-end FY99 had deliveries extending to 3Q00, however,
not all purchase orders are in hand for 1Q00 to meet our sales estimate
of $59 million. We are confident the company will be able to secure the
order needed to meet our estimate.
Presentation Details
1. New manufacturing facility in Oregon is up and running, which adds $3
million to quarterly overhead and we believe current build capacity is 6
systems.
2. Overall capacity utilization in Taiwan is 70%, with leading edge
capability full.
3. Drivers to business include: smaller mask features, more masks per
set, more mask sets, longer write times and the need for advanced PSM/OPC
masks.
4. Total installed base as of the end of FY99 is 223 systems (99 laser
beam and 124 e-beam) versus 25 for JOEL, 23 for Hitachi, and 12 for
Leica.
5. Digirite addresses a potential $100 million market, which Etec just
entered with 4 systems shipped so far.
6. Customers are reluctant to trade in systems for upgrades as they are
reluctant to take the capacity off-line.
Photronics (PLAB, $25 7/16, Buy-1H, Price Target-$29)
Presentation Details
1. Acceleration in the SIA roadmap toward smaller linewidths is driving
revenues are new mask designs are needed.
2. Lack of infrastructure is challenging mask suppliers to support PSM in
volume.
3. 248nm lithography should be extendable to 0.15 micron
4. 193nm lithography should be good to 0.13 micron
5. 157nm will probably be necessary at 0.10 micron
6. Photronics is at the leading edge of NGL mask technologies and sharing
the financial burden of developing and commercializing multiple NGL mask
technologies with the industry (IBM) and US government
7. Beta Squared has proprietary technology for cleaning NGL masks, which
will become important in the future.
8. Company believes capital expenditures will increase for the mask
industry over the next couple of years. Photronics has invested in
leading edge capabilities ahead of the industry curve and is well
positioned for the ramp in high-end masks.
9. Following a difficult time in the early/mid 90's, photomasks have
emerged as a critical enabling technology, which should drive growth for
Photronics.
|
