Detailed report from First Boston:
LRCX has a tremendous earning leverage. this won't be the last time that we see price target change:
BUY
LARGE CAP
Lam Research (LRCX)
Record Operating Margins As Efficiencies Build
Summary
Order Upturn Hasn't Missed Lam - Q2 bookings of roughly $350MM grew 25%
sequentially, paced by record orders in Japan and a strong U.S. showing.
Double-digit sequential gains are possible through Q4.
Top Line Modestly Ahead Of Expectations; Momentum To Continue In The Current
Quarter - Extended lead times will necessitate a vigorous Q3 revenue ramp
comparable to the strong $47MM sequential uptick in Q2.
Excellent Margin Performance - Operating efficiencies were evident as Lam
posted record operating margins of 16.4%. Look for at least 100-basis-point
gains over the next two quarters.
Price Target Mkt.Value 52-Week
01/20/001 (12mo.) Div. Yield (MM) Price Range
USD 143.06 $190 Nil None $6,308.9 $26-145
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
06/01E $4.75 $3.45 30.1X 129% -- --
06/00E 3.85 3.00 37.2 143% -- --
06/99A (1.43) -- NA NA -- --
Sept. Dec. March June FY End
2001E $1.09 $1.16 $1.24 $1.26 June 30
2000E 0.58A 0.98A 1.10 1.19
1999A (0.70) (0.64) (0.37) 0.28
ROIC (12/99) --
Total Debt (12/99) Nil
Book Value/Share (12/99) $11.02
WACC (12/99) --
Debt/Total Capital (12/99) NA
Common Shares 44.1
EP Trend2 --
Est. 5-Yr. EPS Growth 18-23%
Est. 5-Yr. Div. Growth NA
1On 01/20/00 DJIA closed at 11,351.3 and S&P 500 at 1445.57.
2Economic profit trend.
NA = Not
Applicable NM = Not Meaningful
Lam Research is a leading manufacturer of etching systems and an emerging
supplier of chemical mechanical polishers to the semiconductor industry.
Investment Summary
Lam Research is rated Buy. Our raised target price and increased F00 and F01
EPS estimates reflect the combined plusses of a strong order/sales outlook,
together with building manufacturing efficiency. With the highest operating
leverage in the industry, $100MM in incremental sales adds $0.30-0.35 to EPS,
while a point of margin may yield $0.24 per share. With LRCX's etch position
solid, and CMP outlook improving, the company is poised to outgrow the
overall industry. As further efficiency gains accrue, EPS momentum is apt to
build through F01, despite the speed-bump of a higher tax rate next year.
Our $190 target price assumes a 110% relative P/E on CY01 EPS of $5.25, or more.
Strong Bookings Outlook Through the Remainder Of The Year
Q2's 25% sequential order uptick was paced by very strong demand for LRCX's
poly-silicon and oxide etch products, firm demand for CMP cleaners, and
emerging orders for CMP polishers. The polisher momentum is especially
significant, as copper downselections are under way, and we suspect that LRCX
may be the preferred supplier for copper polishers with at least five IC firms,
including the largest user of copper interconnect technology. As in the
prior quarter, we suspect that LRCX gained etch market share in Japan. That
region accounted for roughly $45MM in Q2 orders, up from $34MM in Q1, with
CMP and etch splitting the incremental growth. By contrast, two years ago
LRCX's presence in Japan was next to nil. The etch share battle between LRCX
and Applied Materials (AMAT) appears to have reached a steady state, with
each vendor chipping away at select accounts (LRCX up at TSMC, AMAT up at
Samsung Line 10) and both continuing to make inroads against Hitachi and
Tokyo Electron (TEL). Looking ahead, bookings are apt to grow by 10% or more
in the current quarter, with a similar, or possibly larger gain in Q4,
depending on the timing of 300mm orders and the second round of copper CMP
awards from early adopters of the LRCX tool.
Extending Lead Times Will Drive Q3 Billings Close To That of Q2'
Throughout the industry, Q1:C00 will be a period of vigorous revenue growth, as
chip firms have both boosted their CY00 capital budgets (now forecast to grow by
33% this year) and pulled forward delivery schedules. For LRCX, this is apt to
result in Q3:F00 (March) sequential revenue growth upwards of $40MM (up 15%),
which is significant as it comes on the heels of a 19% gain in Q2. As with
orders, oxide and poly etch led the move upwards. We calculate that Q2's
revenue tally may have included 3-4 CMP polishers, a number likely to grow to
15-20 by the fourth calendar quarter of this year. Calendar 2000 revenues are
now forecast to approach $1.5BB, up from just shy of $900MM in 1999, and well
ahead of the prior record of $1.26BB posted in 1996, at the peak of the last
cycle. Even after stripping out CMP-related revenues, etch billings this
calendar year will approximate those at the peak of the prior cycle - and we
doubt that 2000 will represent the peak year of the current cycle.
Renewed Operating Efficiency Is Driving Margins Above Prior Peak Levels
LRCX has traditionally been the company that could, but didn't, run
efficiently, with prior peak operating margins of 15% - well below the
industry's standards. Management's focus on 1) reduced manufacturing cycle
times, 2) lowered warranty and installation costs, and 3) prioritized R&D, is
paying significant dividends. Q2's variable manufacturing margins were 53%,
down slightly from the 61% posted in Q1, which were impacted by positive
warranty adjustments. Equally significant is the fact that discretionary
spending grew at a pace equal to only 50% of that of the top line. The net
of the above was 43% variable operating margins (a record). While the pace
of improvement is apt to slow going forward, 20% operating margins cannot be
ruled out in F01, lending upside to our EPS forecast.
Minor Noise In Q2
A small acquisition resulted in a $0.15 per share charge in Q2 (yielding net EPS
of $0.83). LRCX benefited by $0.04 per share from a foreign exchange gain,
while a higher 14% tax rate clipped EPS a comparable amount.
Even Fully Taxed, F01 EPS Prospects Appear Solid
A higher tax rate (30% vs. 13%) will shave over $1.00 per share off F01 EPS.
Nonetheless, with the top line projected to grow by nearly 40% next fiscal
year, and benefiting from further margin improvement (approaching, if not
topping, 20%), EPS in F01 are now forecast to grow by 23%, $4.75 (nearly $6.00
at the old tax rate). Tack on $100MM on the top line, or a point of margin, and
a $5+ EPS number is not a stretch. |
