Here is a Merrill Lynch discussion on TER and semi equipment. The idea that DRAM capital spending would be increasing late this year should be good news for ALSC, since it expresses an underlying positive expectation around DRAM going forward. On the other hand, recent weakness in MU and other DRAM makers may temper some of the spending, which would contribute to tighter DRAM supplies and better DRAM prices in the future.
ML:TER val approaches bottom of cycle, expect it to appreciate by 84%
Excerpts from ML 10/5/00 Investment Highlights:
• The September Quarter reporting period for Semiconductor Capital
Equipment should see predominantly in-line to slightly stronger than forecast revenues and EPS. There are some capacity constraints preventing further revenue driven EPS upside from some companies. Orders on average should
grow about 6-7% Q/Q while revenues grow about 10% Q/Q.
• Common themes to watch for on conference calls 1) a noticeable acceleration in 300mm forecasts, 2) a noticeable increase in customers moving to copper, 3) DRAM related capital spending is forecast to begin to grow around year end 2000, and 4) a lack of change in outlook – capital
spending plans of major semiconductor companies remain intact.
• Reducing price targets to reflect valuation realities – maintain ratings and estimates. Concerns on demand for PCs, cell phones, and other technology end products combined with broader macro-economic concerns will temper the valuations of semiconductor equipment stocks even as the fundamentals for capital spending continue to look strong. Thus, we estimate that our previous price targets of 20-25x 2001 on average are generally toon aggressive in the new, end market-demand concerned technology investment mind set. As a result we have adjusted our price targets to 18x on 2000 on average, a level in line with the absolute valuation of the group in the last half of the 1993-1995 cycle. This provides an average of 75% appreciation potential for the stocks in our coverage.
• We expect that once the inventory sell off from PC and wireless related devices is complete, a more accurate end market growth picture will be attained that will be the impetus for a recovery in Semiconductor equipment stocks. Given the fact that many smaller to mid –cap stocks have
reached valuations approaching bottom of the cycle levels, we would expect the group to outperform on positive semiconductor end-market news in the fourth quarter.
Rating Stock Price-10/3 Price/2Ksale Price-To_book CY01E-PE
Target-CY01-PE New-Price-Target Target-Apprc.
2-1 AMAT $51.63 4.1 7.3 13.9 21 $76 * 47%
2-1 KLAC $37.69 3.8 4.3 16.4 22 $50* 33%
2-1 LRCX $22.06 2.0 5.1 9.4 16 $38* 72%
1-1 NVLS $41.88 4.2 3.8 14.4 21 $62 48%
1-1 TER $32.56 1.9 4.0 8.1 15 $60 84%
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