Portion of CSFB comments that might be of your interest:
Etch market penetration and excellent outlook on CMP
business that will drive up the revenue for the coming Q's
Investment Summary
LRCX is rated Buy. The increase in EPS estimates, and target price to $125,
is a function of surging orders driven by the combined plusses of an industry-
wide upturn and penetration gains in both etch and CMP. More vigorous top
line expansion may yield leveraged EPS gains as operating efficiency builds.
Both our F00 EPS projections of $3.20 and F01's $3.75 may be subject to
further upside revision if penetration gains mount or operating leverage tops
our forecast.
Order prospects buttressed by renewed capacity investment
Facing mounting yield issues at 0.18-micron (and even greater difficulties at
0.15-micron design rules) many IC firms are opting to boost new wafer starts
and upgrade older lines as a means to add capacity. Tool intensive, the move
is behind the upturn in process equipment orders that began in October and is
apt to continue into Q2:00. For LRCX's etch business, this may generate
double-digit sequential order growth over the next two quarters which could
be amplified by share gains in the oxide market against its two Japanese
competitors (LRCX's total etch bookings at Samsung line 10 was greater than
the sum of Sumitomo and TEL's). With Hyundai (a traditional LRCX customer)
poised to convert the LG lines (TEL and Sumitomo etch predominantly) to
comparable process techniques next year, prospects for order growth in Korea
is robust, as well as in Taiwan and Europe.
CMP business may be reaching an inflexion point
Two customers do not make a viable business, as was the case with LRCX's
unsuccessful foray into CVD in the mid-1990's. By contrast, we suspect that
LRCX could exit Q3 (March) with as many as six design wins (two in Taiwan,
one in Japan and Europe, two in the U.S. including possibly Big Blue for
copper CMP. Stated goals of a 20% share of CMP bookings by Q4:CY00 are not a
stretch given that a) the TERES polisher is gaining ground in copper CMP
applications (a fertile field, especially in Asia, and b) some smaller
competitors appear to be stumbling in sub 0.18-micron applications, an
opportunity for further share gain. Ultimately, we suspect that LRCX will
emerge as the alternate North American supplier of CMP tools by dint of its
solid performance, global field service organization, and balance sheet.
Margin leverage apt to magnify bottom line gains
Manufacturing margins in Q1 topped 41%, and we look for continues improvement
over the next several quarters as management focuses on lowering factory
overhead rates (now roughly 8%, can go to 6%) and installation and warranty
expenses (two points of upside there as well). Management's longer term high
40% gross margin target may be difficult to achieve in an environment of
three highly competitive suppliers of etch and CMP polishers. Discretionary
spending is not apt to match the pace of revenue growth, and we look for 100-
200 basis point sequential improvement in operating margins continuing into
F01. With variable operating margins above 35%, operating leverage is huge
at LRCX as, on a full taxed basis, an incremental $100MM in sales can add
between $0.40 to 0.50 to EPS. |
