Comments by SSB after their recent trip to Asia:
BBS rates LAM as the company with the most value among
the semi-equipments stocks..
--SUMMARY:----Semiconductor Equipment
Our Asian trip indicates significant upsides to Taiwan cap. ex.
forecast (45%-50% growth during 2000 versus our prior estimate of 29%),
good upsides to Japan spending (up 26% in 1999 versus our forecast of 7%,
and up 22% in 2000, versus our forecast of 28%) and an in-line Korea.
Equipment companies likely to report December quarter reasonably ahead of
expectations, which should provide near term support to valuations with
15%-20% upsides.
The main medium-to-long term question for these stocks is the perceived
supply/demand balance during 2000, for which we expect to get data points
during early 2000.
--OPINION:------------------------------------------------------------------
Please refer to the Taiwan note from 12/7, Korea note from 12/9, and our
conference call presentation for more details.
We just completed an Asian field trip with stops in Taiwan, Korea and
Japan. The capital spending outlook from Taiwan is significantly better
than expectations, Japan was appreciably better than expectations with
Korean spending in-line. This translates to a worldwide capital spending
growth of 13.5% during 1999 (versus our prior model of 10.5%) and 31.6%
during 2000 (versus our prior model of 29.2%). Most equipment companies
such as AMAT, LRCX, KLAC and NVLS are forecasted to grow 30%-40% next
year, so these top-down capital spending figures give us increased
confidence in our bottom-up company growth forecasts. Based on 2001
valuations metrics we see 5%-10% upside from the current levels.
However, with a good December quarter earnings report, we believe that
the 2001 forecasts will likely be revised higher by roughly 10%, which
then translates to upsides of 15%-20% from the current levels.
However, by no means is supply growth trivial. We believe that the wafer
fab equipment market will post a growth of 14%-15% during 1999 (as
compared to a semiconductor industry growth of 15%-16%, SSB Jon Joseph
forecast) and a growth rate of at least 25% during 2000 (as compared to a
semiconductor industry growth of 25%, SSB forecast). Unlike 1999, when
we were enjoying the fruits of a 23% contraction in the equipment market
during 1998, 2000 appears to be a year, when the supply/demand balance
will need to be keenly watched.
In this environment, we would focus on specific opportunities such as Lam
Research (LRCX, 1H, Price Target - $98, $87 3/8) and Etec Systems, the
former providing an upside potential not yet discounted by the Street,
and the latter would be a participant of the mask industry growth
expected during 2000. Lam Research trades at 20-21 times calendar 2001
earnings, as compared to the mid-20's multiple given to other front-end
equipment companies. More importantly, we believe that Lam's operating
margin assumption of 19.5% during 2001, leaves significant room for
upside potential thus providing solid upsides. While prior upturns were
mainly driven by the PC and would hence drive advanced linewidths, the
current upturn is being driven by a wide variety of applications such as
the PC, cellular, flash memories and other consumer devices. Apart from
the PC, we believe that a significant proportion of the other devices
utilize linewidths 1-2 generations behind the current state of the art -
0.18 micron (and we saw ample evidence of that during our trip). This
explains the lack of participation by the photomask sector during the
current upturn, but conversely also implies that during 2000, as the
other applications catch up to 0.18 micron, the mask sector should embark
on a solid recovery. We believe that Etec Systems (ETEC, 1H, Price
Target - $64, $42 3/4 ) is an excellent way to play the recovery of this
sector. |
