Here is another report from SmithBarney. I think it is
worth reading the full report.
10/22/99 Lam Research Corporation (LRCX $74.18,1-H,Tgt $98.00) Milind B
--SUMMARY:--Lam Research Corporation--Semiconductor Equipment
LRCX reported solid 1Q99 earnings of $0.58 versus SSB - $0.50 (FC-$0.48).
Company results include 10% tax, which was not modeled in our/FC forecast.
Bookings of $280-$285 million roughly in-line with our forecast.
Our upgrade is driven by several factors; 1) successful launch of Teres
CMP, 2) Teres ramp allows the company to offset "cleaner" revenue declines,
3) excellent operating expense control allows the company to offset the
effects of any pricing pressures.
Raising FY00 estimate to $2.97 from $2.75, FY01 to $3.46 from $3.05. New
price target is $98, or 25 calendar 2001 estimate of $3.87.
10/22/99 Lam Research Corporation (LRCX $74.18,1-H,Tgt $98.00) Milind B
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 06/99 EPS $(0.70)A $(0.64)A $(0.38)A $0.28A $(1.42)A
Previous 06/00 EPS $0.50E $0.62E $0.77E $0.85E $2.75E
Current 06/00 EPS $0.58E $0.72E $0.80E $0.85E $2.97E
Previous 06/01 EPS $N/A $N/A $N/A $N/A $3.05E
Current 06/01 EPS $N/A $N/A $N/A $N/A $3.46E
Previous 06/02 EPS $N/A $N/A $N/A $N/A $N/AE
Current 06/02 EPS $N/A $N/A $N/A $N/A $4.31E
Footnotes: Note; FY00 earnings are taxed at 10%, FY01 at 30% and FY02 at 30%.
10/22/99 Lam Research Corporation (LRCX $74.18,1-H,Tgt $98.00) Milind B
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:2-H Price (10/20/99)....:$74.18
P/E Ratio 06/00.....:25.0x Target Price..:$98.00 Prior:75.00
P/E Ratio 06/01.....:21.4x Proj.5yr EPS Grth...:12.0%
Return on Eqty 99...:N/A% Book Value/Shr(99)..:12.89
LT Debt-to-Capital(a)40.1% Dividend............:$N/A
Revenue (00)........:N/Amil Yield...............:N/A%
Shares Outstanding..:38.4mil Convertible.........:Yes
Mkt. Capitalization.:2848.5mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
10/22/99 Lam Research Corporation (LRCX $74.18,1-H,Tgt $98.00)
--OPINION:------------------------------------------------------------------
We rate the four front-end equipment companies, Applied Materials,
KLA-Tencor, Lam Research and Novellus Systems as 2H (Outperform, High
Risk). Our view is "as long as the end PC/semiconductor environment
looks positive, these stocks are in a gradual trading range moving
upward. This is a new cycle of 3 quarter upturns/2 quarter plateaus and
it is necessary to be price and valuation sensitive." However, the
intrinsic earnings leverage in Lam Research has allowed the stock to
Outperform its peer group over the last 4-5 months, and we believe that
there is still room to go. On yesterday's call, we got confirmation of
several points; 1) The Teres is now clearly positioned to ramp steadily,
2) The Teres ramp can offset the tapering of the very profitable "p
ost-CMP cleaner" revenue stream, 3) The Exelan/9600 PTX and 9400 are well
positioned, and 4) The company management is maintaining a strict
operating expense control discipline, allowing it to offset the pervasive
etch pricing pressures. We will discuss each point separately in the
note, but with good visibility on each of the fronts, we are raising our
rating from 2H to 1H and our price target from $75 to $98. With respect
to its peer group, Lam still trades at a discount in terms of price/sales
and we believe that with the successful launch of new products, this
discount should narrow as the market begins to factor in a more
profitable revenue stream.
------------------------------------------------------
CY00
Price Sales/Share P/S
----------------------------------
LRCX 77.06 27.0 2.9
AMAT 79.19 14.5 5.5
KLAC 70.25 14.5 4.8
NVLS 72.38 18.4 3.9
----------------------------------
The Teres Is Well Positioned To Ramp.
The linear polisher began its development in June 1994 but is finally
ready for action. We believe that the linear polisher is well positioned
to ramp to a 25% market share within 2-3 years for the following reasons
1) the focus/execution of Lam's management team in targeting new
accounts/processes, 2) the dismal performance of the other non-AMAT CMP
competitors, and 3) the willingness of customers to experiment with new
vendors and adopt a dual source strategy. It is quite amazing that while
Lam Research was losing $0.50 plus per quarter (2nd half of 1998), the
company was able to effectively manage its CMP program and target key
accounts for copper and STI. This focus has paid off and we believe that
the company will be able to secure 2-3 system shipments from at least 4-5
customers. We believe that the actual copper production implementation
from TSMC could take time and could be as late as 2nd half of 2000, but
from here until then, the company should be able to secure enough
revenues from 2-3 system buys from other copper adopters, along with a
few initial customers ramping into volume production for STI and copper.
As a result, we believe that the Teres can ramp quite successfully
through the most tricky period (the first nine months of 2000). Beyond
2000, we believe that there is pressing need on the part of customers to
find a second solution to Applied Materials, and the novel linear
polisher technology fills that need nicely.
The Teres Ramp Can Quite Easily Offset The "Post-CMP Cleaner" Decline.
With Applied moving to the Mirra-Mesa and other polishing vendors moving
to their own cleaner offerings, there was a concern regarding the decline
of the very profitable "post-CMP cleaner" revenue stream, which we
estimate to be $80-$100 million in 1999 with a 55% plus gross margin.
Thanks to the ramp of the Teres, which carries ASPs of 5 times the
"post-CMP cleaner", we believe that the company can easily offset the
potential decline of the cleaner. The margin impact will probably not be
as smooth given that the cleaner probably delivers gross margins of 55%
plus as compared with early learning curve margins on the Teres, however,
we believe that the company will have sufficient other source of upsides
to compensate for the margin impact.
The Exelan/9600 PTX and 9400 PTX are well positioned.
After two years of losing market share, we believe that during 1999 and
2000, Lam will begin to make inroads back into the etch market place and
thus grow faster than the etch market. More importantly, we believe that
the cost reduced "older generation" etch products, newly designed Exelan,
and the strong focus on improving the product reliability and training
and deployment of service and support personnel, should allow the company
to gradually improve gross margins even in a difficult pricing environment
.
In summary, we have always focused on identifying companies delivering
winning products, since that is the key driver to faster revenue/earnings
growth and stock price appreciation. The renaissance that we are seeing
in Lam Research allows us to believe that we have found one. We are
raising our rating from a 2H (Outperform, High Risk) to 1H (Buy, High
Risk) with a new price target of $98.
1Q00 Above Expectations
Actual Estimate
Revenues $242 million $240
million
Gross margin 41.7% 41.0%
Operating expenses 30.5% 32.5%
EPS
$0.58 $0.50
Lam announced another better than expected quarter in 1Q00, with EPS of
$0.58 versus our estimate of $0.50 (consensus-$0.48). Given that the
$0.58 reported number was taxed at 10%, earnings assuming a zero percent
tax rate were actually $0.64 (which is the correct comparable comparison
with our $0.50 estimate). Revenues increased 15% to $242 million,
marginally higher than our estimate of $240 million, driven by increased
activity in Europe and Japan. Taiwan remained reasonably strong despite
the disturbance from the earthquake. The geographic break-out of revenues
was US-40%, Europe-18%, Asia-Pacific-28%, and Japan-14%. Gross margins
improved by 290 basis points sequentially to 41.7%, and beat our 41.0%
estimate by 70 basis points. The improvement in margins were driven by
lower materials costs and improved absorption of overhead costs.
Strong Orders Driven By Europe and Japan
Orders continued strong and increased 10% sequentially to approximately
$280-$285 million, which led to a book-to-bill ratio in excess of 1.15.
Orders were particularly driven by Europe (STM) and increased penetration
into Japan (12% of orders). Taiwan represented 25% of orders and was
reasonably strong after taking into consideration that some bookings were
pushed out of the September quarter into the December quarter due to the
earthquake. Korea was notably weaker as orders are lumpy. The Teres
received its initial orders during the quarter and we believe the company
will be a viable second source to Applied's Mirra. We believe the company
will be able to achieve a 20% booked market share by the end of 2000. We
believe system backlog increased to around $270 million, which represents
4 months of backlog at September's run rate.
Superb Operating Expense Control Is The Hallmark Of Lam's Management
Lam continues to demonstrate superb operating expense control, with
operating expenses only increasing 4% despite the 15% increase in
revenues. Management's efforts to hold operating expenses flattish
despite rising revenues has resulted in incredible operating leverage. As
a percentage of sales, operating expenses declined from 33.5% in 4Q99 to
30.5%, well below our 32.5% estimate. SG&A expenses increased 4%
sequentially to $35 million (14.3% of sales vs. our 15.0% est.) while R&D
expenses increased 4% to $39 million (16.3% of sales vs. our 17.5%
est.). Lam is achieving lower operating expenses than in the previous
upcycles and this is translating into tremendous leverage.
Raising Estimates in FY00 and FY01
Following the better than expected results, we are raising our fiscal
2000 EPS estimate to $2.97 from $2.75. We note that our new estimate
assumes a 10% effective tax rate versus a 0% tax rate to arrive at our
previous estimate. The higher earnings are the result of a higher revenue
forecast of $1.09 billion versus $1.04 billion previously and the
accompanying operating expense leverage (we are lowering our operating
expense estimate to 29.7% from 32.1%). Our gross margin estimate of 43.0%
is essentially unchanged from our previous estimate of 42.9%. We are also
raising our FY01 EPS estimate to $3.46 from $3.05 due to higher revenues
($1.28 billion vs. $1.20 billion previously), better operating expense
leverage (28.4% vs. 30.5% previously), and slightly better gross margins
(46.3% vs 45.8% previously). We are introducing a FY02 estimate of $4.31.
We are raising our price target to $98, or 25 calendar 2001 estimate of
$3.87. Our CY01 estimate assumes that the company will reach gross
margins of 47% and operating expenses of 28% towards the end of FY01
(June).
Following a difficult 1998 (calendar), when etch dropped off sharply, we
believe 1999 will a year of modest growth followed by solid growth in
2000. Lam's growth will be driven by the improving etch market. In 2000,
we look for metal etch to grow 29%, poly etch to grow 32%, and oxide etch
to grow 41%. In calendar 1999, we are modeling the company to grow poly
etch revenues by 3% to $185 million, metal etch by 6% to $190 million,
and oxide etch by 13% to $225 million. In calendar 2000, we are expecting
growth to accelerate, with growth of 24% to $230 million in poly etch,
21% in metal etch to $230 million, and 69% in oxide etch to $380 million.
We believe Lam will have the best success in gaining market share in
oxide etch and we expect its market share to improve from 20% in 1998/99
to 24% in 2000. In metal and poly etch, we look for the company to
roughly maintain its market share in the low to mid 30% range.
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