Report from Prudential on LRCX last earning.
LRCX: BOOKINGS STRONG, PRICING FIRMING, MARGINS IMPROVING, AS
EXPECTED A STRONG 1Q99 - STREET NUMBERS MOVING UP - UPSIDE STILL
EXISTS.
Subject: Lam Research (LRCX?$77 1/16)--OTC
SEMICO
OPINION
Current: Accumulate
Analysts: John W. Pitzer (650) 320-1633 Risk: High
12-Month Target Price: $90
Ind. Div.: -- Yield: -- Shares: 38.9 mil. 52-Wk.Range: 78-10
EPS FY Year P/E 1Q 2Q 3Q 4Q
Current 6/99A ($2.89)A NM ($0.70)A ($2.16)A ($0.38)A $0.28A
Current 6/00E $2.97E 26.0X $0.58A $0.70E $0.79E $0.90E
Prior 6/00E $2.90E 26.6X $0.55E $0.68E $0.78E $0.90E
Current 6/01E $3.40 22.7X
Prior 6/01E $3.40
INVESTMENT HIGHLIGHTS:
Lam reported very strong 1Q00. Lam reported fully diluted EPS of $0.58
(inclusive of a 10% tax rate - $0.64 without tax) versus our recently upwardly
revised estimate of $0.55 (no tax rate) on in-line revenue and better margins.
Strength of demand was driven by good sales into the US (40% of revenue) and
Asia (28% of revenue). Figure 1 provides a breakdown of results.
Figure 1: Lam Research--1QFY00 Financial Results
(Dollars in million, except per share)
1QFY00A 1QFY00E 4QFY99A 1QFY99A
Revenue $241.6 $240.0 $210.9 $142.1
Gross Margin 41.7% 40.0% 38.8% 35.3%
Op Margin 11.2% 8.4% 5.2% -18.8%
Tax Rate 10.0% 0.0% 0.0% 0.0%
Net Income $24.7 $20.4 $11.3 ($26.8)
EPS* $0.58 $0.55 $0.28 ($0.70)
S/O 42.6 MM 41.0 MM
Source: Company reports and Prudential Securities estimates.
Solid bookings in 1Q00 with good sequential bookings. Lam had originally given
guidance for modest sequential bookings growth in 1Q00. We believe that
bookings grew approximately 10-15% sequentially yielding a book to bill of
approximately 1.15 to 1.20 - above our estimate of 1.1 to 1. We believe that
bookings and billings were impacted modestly by the Taiwan Earthquake - which
should reverse itself in 2QFY00. Strength of order rates came from Europe (31%
of orders) and Asia (30% of orders).
Visibility improving and is sustainable. On top of a strong 1Q00 both in
revenue, EPS, and bookings, visibility for Lam is improving in the current
environment. The Company should continue to post sequential gains across the
board in the coming quarter. In particular, we believe that Lam will begin to
benefit from: (1) an uptick in business in Korea which was relatively tame in
1Q00; (2)continued strong order and shipment patterns from Taiwan; (3) initial
shipments and ramp of the companies CMP product with a targeted goal of 20%
booked market share at the end of calendar 2000; and (4) continued gross and
operating margin expansion.
Raising our recently revised estimates modestly. On October 18, we raised our
estimates for LRCX in anticipation of a strong 1Q00 earnings report. Despite
that increase, we are again modestly increasing our estimates for 2Q00 and
FY00 to $0.70 from $0.68 and to $2.97 from $2.90. Note our previous estimates
were based upon a zero percent tax rate, our new increased estimates are
inclusive of a ten percent tax rate. For FY01, we are maintaining our EPS
estimate of $3.40. Current street consensus is $3.00, which we believe will
move up into our estimates.
Figure 2: Estimate Revisions
(Dollars in millions, except per-share data)
2000E New 2000E Old 2001E New 20001E Old
Revenue $1106.6 $1071.0 $1,337.5 $1289.5
Gross Margin 42.6% 41.7% 44.5% 44.1%
Op?g Margin 13.0% 11.0% 16.1% 14.6%
Net Income $131.2 $119.3 $151.4 $140.4
EPS $2.97 $2.90 $3.40 $3.40
Fully Txd EPS* $2.31 $2.03 $3.40 $3.40
*Tax Rate is 30%
Source: Prudential Securities estimates.
Upside to our estimates continues to exist. We believe that upside potential
to our estimates exists based upon better revenue growth and expanding gross
and operating margins. Our current estimates for FY01 are based upon an
operating margin assumption of 16%. We believe that the targeted operating
margins for the Company is 18-20%. For every one point of operating margin,
there is approximately 21 cents upside to EPS.
Lam is making good progress on market share for Etch. We believe that Lam has
stemmed the market share losses especially in two key markets, Taiwan and
Korea. In addition, we believe that the Company?s new Excelon product should
allow them to gain market share over the next 12 months. The only relative
concern in the quarter was lower than expected bookings in the US. We believe
that book to bill in the US was approximately parity or slightly below 0.8 to
0.9, while exacerbated by timing issues on strong billings, we do believe that
the Company is relatively better positioned in Asia and Europe than the US -this
should represent upside potential over the next several quarters.
Valuation--Price target is $90. In our view, Lam is a turnaround story finally
coming to fruition. As such, we believed and still believe that Lam?s P&L had
the most leverage in our universe - a combination of internal improvements in
operating metrics as well as a cyclical turnaround in the business. We now
believe that Lam should sell at a premium multiple for at least the next
couple of quarters as numbers on the street move higher. Our price target of
$90 is 26 times our new calendar 2000 EPS estimate of $3.40.
Prudential Securities Incorporated makes a primary over-the-counter market in
the shares of Lam Research.
Prudential Securities Incorporated (or one of its affiliates) or its officers,
directors, analysts, or employees may have positions in securities or
commodities referred to herein and may, as principal or agent, buy and sell
such securities or commodities. |
