It never ceases to amaze me how much operational leverage
LRCX has to further increase EPS. We don't need stock
split hype to see a higher price. On fundamentals alone,
LRCX will be heading higher.
Now enjoy this detailed report from CSFB:
nvestment Summary
Lam Research is rated Buy. Our increased EPS estimates for F00 and F01
reflect prospects for continued strong order rates, which will drive top-line
growth prospectively into CY01. The etch business is strong, and polisher
penetration could be an upside driver later this fiscal year. While
manufacturing margins may struggle to reach the high-40% level, we view our
20%-type F01 operating margins as extremely conservative. Investors are
reminded that LRCX's financial leverage is among the highest in the industry,
with a point of margin and/or $100MM in additional revenues worth upwards of
$0.25 per share.
No Let-Up In Order Momentum At Lam
Bookings in both Q3 and Q4 could grow by 15% or more sequentially, paced by
robust overall industry order trends as well as selective gains in etch and
CMP. Led by Taiwan, order rates throughout the process equipment industry
are very strong, and only those companies losing market share are apt to post
less than record orders in the March quarter (LRCX's estimated $415MM in Q3
orders would top the prior record of $396MM, set in Q3:96). Beyond the
strong industry tailwind, we sense that LRCX may be making some inroads
against their Japanese etch competition for both oxide - via the Exelon medium
-density tool - and polysilicon - buttressed by an improved high-density
product. The oxide market may be the fastest grower over the next three years,
led by burgeoning copper applications. Copper-related demand is also
behind the uptick in polisher quote activity. We suspect that upwards of a
half dozen major IC manufacturers are committed to using the LRCX polisher for
both metal (copper) and oxide applications.
Software May Cap March Sales Upside; Not So IN June and September
Like Applied Materials (AMAT), LRCX will be implementing a new production
software system in March (different vendor, hopefully different results).
While no glitch is foreseen, LRCX will have to slow production during the
rollout, and hold the prior legacy system in reserve. This is apt to limit
revenue upside in Q3, and we suspect that upside to our forecast $332MM in
sales may be limited. With a projected book/bill upwards of 1.2:1 in Q3, and
no let-up in Q4's order momentum, we look for a 15-20% uptick in Q4's
shipment rate above that of Q3.
Plenty Of Capacity In Place - LRCX's floorspace can support twice the present
manufacturing volume, roughly $650MM per quarter, with only modest additions
to headcount. As envisioned, Q3's $40+MM sequential revenue gain is apt to
be followed by a more vigorous $50MM uptick in Q4.
September Quarter Will Be Strong As Well - We sense that the Q4:F00 (June)
shipment surge may not be a one-time event, and September's (Q1:01) momentum
could be nearly as strong. Round up the usual top-line driver suspects, and
add back a sharply higher polisher shipment forecast.
Polisher Growth To More Than Offset Subdued External Cleaner Sales - For
competitive reasons, Applied Materials is attempting to migrate customers
away from the LRCX cleaner to AMAT's own, integrated with Applied's polisher.
Restrained OEM sales have led to a leveling in cleaner shipments, despite
a growing end-market. Momentum could reaccelerate in F01 as a 50% sequential
uptick in polisher shipments (albeit off of a low base) cannot be ruled out
in Q1 and Q2 of F01.
EPS Upside Keyed To Further Margin Improvement
LRCX's etch margins are unlikely to ever match those earned in the industry
for deposition products. This reflects a significantly more competitive etch
market (four major vendors) as opposed to CVD (just two) and PVD (Applied
owns upwards of 60% of the business). Moreover, early versions of the Teres
polisher are effectively being hand-built, resulting in manufacturing cycle
times upwards of 13 weeks, as opposed to a target of 6-7 weeks. Thus, mix is
not apt to deliver big margin gains in the short term, while stepped-up R&D
on a next generation etch product will be evident in Q3's results. The above
suggests that following two quarters of vigorous improvement in LRCX's
operating margin (from 5% in Q4:F99 to 16% two quarters later), profitability
improvement is apt to be more gradual, going forward. Yet, we still look for
100 basis point-type improvement in operating margins in both Q3 and Q4 as
the period's vigorous projected top-line expansion will yield improved
overhead absorption, and growth in discretionary spending may not match that
of the top line. In CY01, we have allowed for operating margins to creep up
to 20%, some six percentage points below the industry's forecast norm.
Herein lies the opportunity for LRCX. Just closing the gap midway could
boost operating margins by three percentage points, each of which would add
upwards of $0.25 per share.
Still No Getting Around Higher F01 Tax Rate
EPS, as opposed to operating, comparisons will stiffen next year as LRCX's
tax rate returns to a normal 30%, versus 14% this fiscal year. Sequential
EPS comparisons will be most difficult in Q1:F01 (September 2000, probably
down vs. June quarter) while H2's results may reflect an industry-wide
moderation off of the current torrid and unsustainably high pace of growth. |
