More detailed report on LRCX's earning.
Enjoy !
BUY
LARGE CAP
Lam Research (LRCX)
In-line Quarter with Booking Momentum Continuing into 2HCY00. Raising
Estimates and Price Target.
Summary
LRCX reported strong 3QFY00 results. EPS of $0.37 was in-line with our
estimate and slightly better than street consensus of $0.36. Upside in the
quarter was capped by production software implementation - revenue should
accelerate in June and September quarters.
At $440 million, bookings in 3Q outpaced our $415 million estimate.
Sequential bookings growth of 25% continues to outpace the industry as LRCX
is driving selective gains in etch and CMP. Expect double digit growth in
bookings in 2HCY00 from 1HCY00.
Raising estimates, continued margin gains are probable - We are raising our
estimates for FY00 and FY01 to $1.34 and $1.95 from $1.33 and $1.77
respectively. We expect leverage both on the gross and operating lines to
provide upside to our estimates.
Valuation with upside to estimates attractive. LRCX is currently selling at
22 times our calendar 2001 EPS estimate of $2.20. Our price target is $70 or
32 times our C01 EPS estimate.
Price Target Mkt.Value 52-Week
04/18/001 (12mo.) Div. Yield (MM) Price Range
USD 48.88 $70 Nil None $7,131.6 $57-8
Annual Prev. Abs. Rel.
EPS EPS P/E P/E
12/01E $1.95 $1.77 25.1X 111%
12/00E 1.34 1.33 36.5 147%
12/99A (0.48) NA NA
Sep Dec. March June FY End
2001E $0.43 $0.48 $0.51 $0.53 Jun. 30
2000E 0.19A 0.33A 0.37A 0.44E
1999A (0.23) (0.21) (0.12) 0.09
Total Debt (03/00) 323.1
Book Value/Share (03/00) $4.73
Debt/Total Capital (03/00) 0.3
Common Shares 145.9
Est. 5-Yr. EPS Growth 18-23%
Est. 5-Yr. Div. Growth NA
1On 4/18/00 DJIA closed at 10767.4.0 and S&P 500 at 1411.6.
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 increased EPS estimates for F00 and F01
reflect continued strong order rates, which will drive top-line growth into
CY01. The current capacity cycle is driving strong growth in the etch market and
we believe LRCX is gaining share, especially in oxide with the introduction of
its new Exelon chamber. In addition, further penetration into CMP polishing
with a target goal of 20% booked market share by 4QC00, should provide
further upside to estimates. Investors are reminded that LRCX's financial
leverage is among the highest in the industry with a point of margin and/or $100
million in additional revenue worth upwards of $0.20 per share.
In-line 3QFY00, Better Than Expected Bookings.
Going into 3QFY00, we anticipated capped upside due to software implementation.
Fully-diluted EPS of $0.37 was in-line with our estimate and a penny better
than street consensus of $0.36. Upside to 3Q was limited as Lam, like Applied
Materials in 1Q00, implemented a new production software system in March.
Although LRCX had little to no conversion issues, the Company scheduled a one
week shutdown to transition to the new software platform, limiting upside to
revenue and EPS in the quarter. However, bookings momentum continued strong
as we estimate that bookings in 3QFY00 grew greater than 25% sequentially to
$440 million from the $350 booked in 2QFY00. Strength in orders were driven by
Asia and a resurgence from Japan (capital budgets in Japan are likely to
increase 25% in the new fiscal year.) North America represented 26% of orders,
Europe 23%, Japan 14% and Asia Pacific 37%.
Visibility Is Increasing And We Expect A Re-acceleration Of Bookings In 2HC00
June quarter bookings estimate could be conservative. We are estimating
bookings in the current quarter of $470 million up approximately 7%
sequentially. Given the robust order environment we suspect that our initial
estimate could prove conservative as we move through the quarter. 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. However, we do believe that
the planets are moving into alignment for 2HCY00. The convergence of CMP,
Exelon for etch, and 300 MM initial ramp should provide the foundation for
double digit sequential growth in bookings from our 1HCY00 estimate of $910
million.
Raising Estimates To Reflect Better Fundamentals
Here are our new estimates. We are raising our estimates for FY01 to $1.89
billion in revenue and EPS of $1.95 from $1.84 billion and EPS of $1.77,
while allowing operating margins to expand from 19.6% to 20.4%. Our EPS
estimates for CY00 and CY01 are moving to $1.72 and $2.20 from $1.64 and $2.
00 respectively. Investors should note that EPS growth in FY01 and CY01
include an increase in tax rate from 14% in FY00 to 30% in FY01 and 23% in
CY00 to 30% in CY01. Our new estimates are also based upon fully-diluted
share counts, accounting for a convertible offering the Company completed in
1997. The impact of a fully-diluted share count is slightly negative,
approximately 1 cent per quarter.
Despite Upward Revision, Leverage Still Exists As Does Upside to Estimates
The leverage is still very much present. We believe there continues to be
leverage in the model based upon better revenue and tighter expense controls.
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 was 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 Q4 and 1QFY01
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 20.4%, 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.
Valuation Compelling - Raising Price Target.
Raising our price target to $70 from $65. Based upon our new CY01 estimate of
$2.20, we are raising our price target to $70 from $65, or 32 times our CY01
EPS estimate. The Semiconductor Capital Equipment Industry is currently
benefiting from a robust capacity cycle that we believe continues to have
legs through the 300 mm transition. Lam should benefit as we move into 2H00
as CMP and 300 MM orders and revenues begin to add to the strength of the
core etch business. In addition, good market penetration in Asia and Europe
could be followed up in the US in late 2000 adding to our already conservative
estimates. |
