More on comments by MSDW:
Komatsu pulls the plug: we believe Komatsu's laser business transition to a JV was a stealth divestiture.
Cymers potential share loss risk is far less: we believe Komatsu is eliminating its field service operations and holding back key employees from JV.
Raising Rating to Strong Buy, Reiterate $80 target. At 17 x our new 2001 EPS estimate, Cymer is one of the best relative value plays in equipment.
Raising EPS estimates. F2000 from $1.58 to 1.60; F2001 from $2.20 to 2.35.
Other excerpts: We see upside EPS potential in 2001 to the $2.70 to $3.00 range. Raising CYMI shares to Strong Buy and pounding the table on our Cymer recommendation for the following primary reasons:
We view Komatsu's excimer laser JV with Ushio as a stealth divestiture. We also believe Komatsu is hamstringing the JV by withholding key management, technical, and field service human resources. In our opinion, this minimizes Komatsu's competitiveness and reduces market share loss risk for Cymer on a secular basis.
Increasing demand for photolithography tools, especially from ASML is driving upside to our previous EPS estimates.
Valuation. At 17.6 x our new 2001 EPS estimate, CYMI shares are trading at a discount to the group average of 19.0x. Given its superior long term growth potential of 30% compared to the industry average of 16%, CYMI shares usually trade at a significant premium to the group. Concerns about market share loss have reduced CYMI multiples over the past few months. We view the new information regarding Komatsu's unwillingness to continue to commit resources to its money losing excimer laser business as a major positive for Cymers long term competitive position. This should drive CYMI multiples higher.
Komatsu has reached the 15% market share level after years of struggling to penetrate laser market. However, we believe the venture has never achieved profitability.
About a month ago, Komatsu announced that it formed JV with Ushio. Ushio has been trying to develop an ArF laser.
As the month has unfolded, we are becoming increasing convinced that Komatsu is executing a stealth divestiture of its laser business. Some of the key variables that lead us to draw this conclusion ar the following:
Very few top managers are going to the JV from Komatsu. The top executive and others are being moved to new positions in other Komatsu businesses.
A number of scientists are also being reallocated to other Komatsu businesses.
We believe Komatsu, which has sold almost exclusively into Japan and Korea has informed the photolithography system vendors that they plan to scrap their field service force starting immediately in Japan and over the next 3-4 months in Korea. Canon has already transitioned laser orders for two photolithography systems destined for Taiwan to Cymer from Komatsu since hearing about Komatsu's new field service plans. Ushio does not have much of a field service force since its traditional light bulb sources were mostly sold through distributors outside of Japan and were not service intensive.
ASML and SVGI have both completely outsourced their laser service to Cymer, which deals directly with chipmakers. While neither of these suppliers has used Komatsu, their strategy on outsourced laser service essentially eliminates 45-50% of the potential market for the Ushio-Komatsu laser business, and severely limits upside potential in the other half.
Additionally, although Nikon prefers to be the point contact for laser repairs of its installed base, it usually calls in laser vendor service technicians for difficult problems. Komatsu's inability to fill that void will cause Nikon to allocate scarce human resources to a new area while it is struggling to ramp with the cycle. The easy way out will be to bias laser purchases to Cymer, which has ample capacity.
We believe Komatsu's actions will result in significantly less risk of market share loss for Cymer from a secular perspective. |
