Excerpts from some research reports posted 11.16.00 just after the last CC. Now that the election is behind us, perhaps we can refocus on the fundamentals:
UBS Warburg
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We are maintaining our Hold rating with a 12-month target price of $38.
Management expressed concen with certain macroeconomic factors which were affecting visibility. Enumerated
concerns included:
1. Decelerating global GDP growth
2. Uncertainty regarding the US presidential election
3. High oil prices
4. Currency fluctuation (which we interpret as concerns over the currently high US$/Euro exchange rate)
5. The movement from an initial euphoria regarding new technology (with high growth rates) to a more mature
outlook (lower growth).
Management felt telecommunications capex weakness would be felt most strongly in Taiwan.
IS THERE STILL DOWNSIDE?
In our view, this cycle is unique. Previous downturns have been driven by oversupply, resulting in too much
production capacity. Such excess can take several years to correct. The current cycle seems driven by a weakness in
end-market demand.
We believe it is increasingly clear that hardware rates of adoption have been overestimated, while levels of product
saturation have been understated. In retrospect, the unsustainable rapid consumption of early adopters was likely
misread as the rate of steady state expansion.
Such a demand-driven cycle is likely to be softer and shorter in duration than an oversupply cycle. New product
introductions, plus any favorable macroeconomic developments, could stimulate a rapid resurgence in end-market
demand.
METRICS
During the last 2 down cycles, AMAT trailing 12-month revenues declined by 26% and 14%, respectively, measured
from peak to trough. We also observe AMAT usually trades within a range of 1.8x to 4.0x Market cap to Sales
(trailing 12-months).
The matrix below indicates a number of potential growth/market capitalization scenarios, and the implied share prices
which result.
TABLE 5: POTENTIAL FY01 GROWTH SCENARIOS
Mkt cap/sales (LTM)
FY01 annual growth 2.0 3.0 4.0
20% $28.23 $42.35 $56.47
17% $27.53 $41.29 $55.05
0% $23.53 $35.29
-10% $21.17 $31.76
Our analysis indicates the market is pricing no additional revenue or multiple contraction into AMAT. Specifically, we
believe current prices in the low $40s appear to indicate that the market is now pricing flat quarterly revenue
performance for 2001 (20% year-over-year growth).
We, however, remain cautious that all the incremental bad news is not out, and we continue to monitor the the end
markets closely. We would expect actual contraction in revenues, if it becomes evident, to push valuation lower.
We note that semiconductor industry dynamics tend to result in order pushouts just before scheduled delivery.
Historically, order push-outs have been sudden, and are preceded by little warning.
Should significant push outs, and consequent revenue contraction, become apparent, we believe value investors
should scale into Applied in the low to mid $30s. We believe this guidance is also appropriate for investors with a
longer time horizon who can withstand multiple quarters of uncertainty.
SG COWEN
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AMAT believes that the chip equipment
market will probably grow in-line with chip revenues-which would result in Y/Y growth of at least 20% for next year.
However, a look back at the past 5 years indicates that chip revenues and chip equipment typically do not grow at the
same rate.
We are lowering our earnings projections for the company to levels consistent with our current capex expectations for
2001, while also taking into account the guidance for FQ1 provided by the company. Our new C2001 EPS estimate
is $2.71. Applying an 18x multiple (in-line with historical valuations at this stage of the cycle) on our new C2001 EPS
estimate yields a revised price target of $49.
CHASE H&Q
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The second shoe finally dropped.
Q1F01 guidance was quite weak, with bookings expected to decrease 11% below Q4F00 levels. Revenue and
EPS are expected to remain flat with current levels.
Our sense is that the company's tone on the conference call has decidedly changed for the worse; C01 capital
spending is lowered by the company from 30% to 20%
Despite the 63% drop in share price from its peak level, the current NTM P/E of 14 times is still closer to historical
peak levels than trough levels, which could indicate further downside.
Valuation. As of Wednesday's close, shares of Applied have dropped 63% below their $115 April high. However, in
relation to previous cycles, the stock is still valued relatively high. For instance, at the previous peak in July 1995
AMAT shares were trading at 18.7 times the consensus NTM earnings estimates. At the subsequent July 1996 trough
levels, the same shares were trading for as little as 7.6 times NTM earnings. Currently, shares of AMAT are trading at
14 times our NTM forecasts. As such, the current multiple is still closer to peak levels than trough levels, indicating
that if indeed things are beginning to slow down, there is more room on the down side.
Lowering Estimates. Taking into account the various signs of slowing growth going forward, including management's
guidance for flat revenue for the next quarter, we are further lowering our estimates for F01, on top of the recently
lowered numbers following last month's downgrade. We are lowering Q1F01 revenue and EPS to $2.95 billion and
$0.77 from $3.1 billion and $0.80, respectively. For F01 are adjusting our estimates to $12.25 billion and $3.02 from
$12.4 billion and $3.16.
MERRILL LYNCH
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We are reducing EPS estimates for fiscal 2001 from $3.50 to $2.95, a conservative outlook to reflect low visibility
on 2HFY01.
* We believe that the market has discounted a more dramatic down turn than is likely to occur, providing a near term
"relief rally" potential for the stock. We reiterate our Accumulate/Buy rating.
Maintain Accumulate/Buy but lower price target to $55 from $76
With the potential for 20% revenue and EPS growth in 2001 even with relatively flat Q/Q trends, we believe that
Applied could trade toward a 18x P/E on our new $2.95 EPS estimate for a $55 price target. |
