Words from SSB on LRCX: Read it and enjoy...
--SUMMARY:--Lam Research Corporation--Semiconductor Equipment
Very strong 2Q00 with earnings of $0.98 (SSB-$0.72, FC-$0.72), and bkgs of
$350 million above our $330-$340 million estimate.
Outlook for high single digit low double digit order growth in 3Q00. One
of the best guidance in the equipment sector.
Revising FY00 to $3.90 from $2.97 and FY01 to $4.90 from $3.46. New price
target is $191, or 35 times cal. 01 earnings estimate of $5.46.
More importantly, we still see 200-300 basis points upsides in gross
margins, which offers us additional protection. Reiterate 1H and Top Pick
2000 rating.
01/20/00 Lam Research Corporation (LRCX $136.37,1-H,Tgt $191.00) Milind
--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 $0.58A $0.72E $0.80E $0.85E $2.97E
Current 06/00 EPS $0.58A $0.98A $1.08E $1.22E $3.90E
Previous 06/01 EPS $N/A $N/A $N/A $N/A $3.46E
Current 06/01 EPS $1.08E $1.17E $1.26E $1.38E $4.90E
Previous 06/02 EPS $N/A $N/A $N/A $N/A $4.31E
Current 06/02 EPS $N/A $N/A $N/A $N/A $5.75E
Footnotes:
01/20/00 Lam Research Corporation (LRCX $136.37,1-H,Tgt $191.00) Milind
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (01/19/2000)....:$136.37
P/E Ratio 06/00.....:35.0x Target Price..:$191.00 Prior:98.00
P/E Ratio 06/01.....:27.8x Proj.5yr EPS Grth...:25.0%
Return on Eqty 99...:N/A% Book Value/Shr(99)..:12.89
LT Debt-to-Capital(a)40.1% Dividend............:$N/A
Revenue (00)........:N/Amil Yield...............:N/A%
Shares Outstanding..:38.4mil Convertible.........:Yes
Mkt. Capitalization.:5236.6mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
01/20/00 Lam Research Corporation (LRCX $136.37,1-H,Tgt $191.00)
--OPINION:------------------------------------------------------------------
Investment Thesis:
For the fifth quarter in a row, Lam Research delivered solid
bookings/revenue/earnings upsides driven by the industry pick-up, market
share gains and superb operational execution. We are raising our fiscal
2000 earnings estimate from $2.97 to $3.90, our fiscal 2001 estimate from
$3.46 to $4.90, and our price target from $99 to $191, or 35 times
calendar 2001 earnings estimate of $5.46. While Lam Research trades at a
similar 28-30 times multiple on calendar 2001 earnings as its peer group,
we believe that there are three reasons why the stock has more upside
potential (which is why we rate it as our Top Pick during 2000) - 1)
Appreciable gross margin upsides - We are modeling Lam Research to reach
gross margins of 46.3% during FY01 which opens up the possibility of
200-300 basis point upside potential, and 2) New product cycle in CMP -
We believe that with Applied Materials holding CMP market share of 70%,
there is clear need for a strong competitor and the revolutionary
advantages of the linear polisher open up significant room for Lam to
rapidly ascend from 0% to 30% market share and 3) Better end market
exposure - For the last 4 years, we have been surprised by the CMP market
growth (for example during 1999 we estimate that the CMP market grew
60%-80% versus the industry growth rate of 20%), and we believe that
there are at least 1-2 years of accelerated growth in store for the CMP
market. With the Teres ready to ramp, Lam is positioning itself in a
solid end-market. Net-net, we are reiterating our 1H (Buy, High Risk)
and Top Pick - 2000 rating and believe that it should be the best
performing stock in our coverage universe.
Key Points:
1. Orders were well distributed across all geographical regions and not
skewed towards Taiwan as many other equipment companies, which implies
that bookings growth should be more sustainable. We look for high single
digit to low double digit order growth in the March quarter.
2. Teres is ramping nicely and the company should be able to achieve
volume 5-10 system orders as early as the June quarter. A 20% booked
market share in 2000 looks very achievable. This should more than offset
the decline in the CMP cleaner revenue stream.
3. Lam is revising its etch market growth forecast to 40% in 2000. This
is consistent with our estimate, with some room for upside.
4. Gross margin improvements are still quite conservative given the ramp
in revenues. We believe there are still upsides here. Look for superb
operating expense control to continue which will allow for good leverage
and a steep ramp in earnings. We could still see some modest upside
surprises here if sales are stronger than expected.
2Q00 Details:
Quarter Well Ahead Of Expectations
Actual
SSB Estimate
Revenues $289 million $270 million
Gross margin 43.5% 42.8%
Operating expenses 27.1% 29.7%
Operating margin 16.4% 13.1%
EPS
$0.98 $0.72
Consistent with other equipment companies, Lam announced a significantly
better than expected fiscal 2Q00, with EPS of $0.98 versus our estimate
of $0.72 (consensus). However, earnings were actually $1.02 if taxed at
the previous guidance of 10%, versus the 14% tax rate reported in the
quarter. Fully taxed at 30%, EPS would have been $0.80. Upside was due to
higher revenues/gross margins, better operating expense leverage, and
higher non-operating income. Revenues increased 20% sequentially to $289
million, 7% higher than our estimate of $270 million, driven by pull-ins
of deliveries. Asia-Pacific and Taiwan were notably strong, each
representing 31% of sales while North America accounted for 28% and Japan
10%. Gross margins improved by 180 basis points sequentially to 43.5%,
and beat our 42.8% estimate by 70 basis points. The improvement in gross
margins continues to be driven by lean manufacturing initiatives and
improved absorption of overhead costs. The company is targeting to reach
gross margins of 45% by the June quarter. We believe this is very
achievable with some room for upside.
Strong Orders Driven By North America and Japan
Orders accelerated from September and increased 25% sequentially (vs. a
10% seq. increase in Sept. to approximately $350 million from $280-$285
million. Book-to-bill improved to 1.20+ from 1.15. Orders were
particularly driven by North America and increased penetration into
Japan. Unlike many equipment companies that recorded a
disproportionately high percentage of orders from Taiwan, Lam's orders
were well distributed in all regions of the world as follows: North
America - 30%, Europe - 30%, Japan - 13%, Asia Pacific - 37%. Korea was
the only weak region (most likely due to slow activity at Hyundai-LG).
The Teres is ramping well, with multiple orders received during the
quarter. Interest for copper CMP is strong and we believe the company
should begin receiving 5-10 system orders as early as June. We expect Lam
to achieve a 20% booked market share by the end of 2000, which will
offset the decline in the cleaner revenue stream. 300mm orders were
minimal but expected to ramp in the next 9-12 months. Our model indicates
that system backlog increased to around $330 million from $270 million,
which represents slightly over 4 months of backlog at March's projected
run rate.
Very strong Operating Expense Control Continues.
Lam continues to demonstrate superb operating expense control, with
operating expenses only increasing 6% despite the 20% increase in
revenues. Management's ability to hold operating expenses flattish
despite rising revenues has resulted in incredible operating leverage. As
a percentage of sales, operating expenses declined from 30.5% in 1Q00 to
27.1%, well below our 29.7% estimate. SG&A expenses increased 10%
sequentially to $38 million (13.2% of sales vs. our 13.8% est.) while R&D
expenses increased 3% to $40 million (14.0% of sales vs. our 15.9%
est.). The company's long-term target is for operating expenses to
decline to 25-26% of sales, split between 12-13% in SG&A and 13-14% in
R&D. We are modeling the company to reach operating expense of 26.1% in 4Q
00 and 25.0% in 4Q01.
Raising Estimates And Price Target.
Following the better than expected results and our expectation for faster
etch market growth (40%+), we are raising our fiscal 2000 EPS estimate to
$3.90 from $2.97. We note that our new estimate assumes a 13.5% effective
tax rate versus a 10% tax rate to arrive at our previous estimate. The
higher earnings are the result of a higher revenue forecast of $1.21
billion versus $1.09 billion previously, slightly higher gross margins
(43.8% vs. 43.0%), and the accompanying operating expense leverage (we
are lowering our operating expense estimate to 27.4% from 29.7%). We are
also raising our fiscal 2001 EPS estimate to $4.90 from $3.46 due to
higher revenues ($1.64 billion vs. $1.28 billion previously) and better
operating expense leverage (25.3% vs. 28.4% previously). Our gross margin
estimate remains unchanged at 46.3%. Our fiscal 2002 estimate increases
to $5.75 from $4.31.
Our model calls for 61% revenue growth in calendar 2000, which we believe
is achievable given that Lam should gain some share in the etch market
and gain appreciable share in the CMP market. This is also consistent
with Novellus' and KLA-Tencor's growth rates of 80% and 60%,
respectively. We are reiterating our Buy rating and raising our price
target to $191, or 35x our calendar 2001 estimate of $5.46. We are using
a 35x multiple to value the shares of Lam, which is consistent with the
multiple afforded to KLA-Tencor and Novellus. More importantly, with
200-300 basis point upside in gross margins, a new CMP product cycle
kicking in, and a richer end-market exposure, we believe that Lam
Research will be the best performing stock in our coverage universe dur
ing 2000 and we are reiterating our 1H (Buy, High Risk) and Top Pick 2000
rating. |
