PHTN - research notes from Thursday.
Btw, I totally dont agree with any of these views.
Next 3 quarters forecasts are for losses and further losses could come just as easily.
RESUME COVERAGE WITH A BUY RATING. Page 1 of 2 --
03:48pm EDT 19-Jul-01 Needham & Co. (Jim Ricchiuti 212-705-0381) PHTN
Equity Research Note Jim Ricchiuti(212)
705-0381
July 19, 2001 Lee Zeltser(212)
705-0394
Photon Dynamics, Inc. (PHTN/OTC)
Resume Coverage With A Buy Rating
Price (7/19/01): $31.66 (2:05 pm intraday) Shares Outstanding (MM):
14.0
52 Week Range: $74.63-$16.69 Market Cap. (MM): $434.0
million
Recommendation/Target: Buy/$38-$40 Average Daily Volume (000):
200
Price/Sales: 4.7x Book Value Per Share:
$10.51
9/99A 9/00A 9/01E* 9/02E
New New
Revenue (MM) $62.0 $94.8 $73.8 $84.2
Growth 53% (22%) 14%
Op. Margin 5.9% 1 4.2% NMF 1.7%
EPS: 1Q $(0.09) $0.20 $0.38 (0.19)
EPS: 2Q 0.05 0.25 0.13 0.03
EPS: 3Q 0.14 0.31 (0.15) 0.19
EPS: 4Q 0.16 0.32 (0.30)E 0.33
EPS: Year $0.29 $1.09 $0.08 $0.37
Growth 276% (93%) 363%
P/E Ratio 395.8x 85.6x
* Excludes one-time items. CY01 estimate is a loss of $0.56. CY02 EPS
estimate
is $0.89.
* We are resuming coverage of Photon Dynamics with a Buy rating.
* PHTN supplies yield management solutions to the flat panel display (FPD),
printed circuit board (PCB) and advanced semiconductor packaging industries.
PHTN has also emerged as a leading supplier of automated display inspection
and alignment systems to the cathode ray tube (CRT) and automotive glass
industries.
* While FPD equipment bookings have fallen off sharply, we believe PHTN
remains
well positioned to benefit from the next wave of capital spending in the FPD
industry, which will be driven by the shift to larger 1m x 2m glass
substrates
and retrofitting of existing capacity for low-temperature polysilicon (LTPS)
applications.
* We expect the loss for F4Q will total $0.30 per share, at the midpoint of
the
$0.25-$0.35 loss management is targeting. We expect momentum to build in
F2Q02, benefiting from increased shipments to the FPD market and a recovery
in
the electronics market. For F02, we expect EPS of $0.37 on revenues of $84.2
million.
* PHTN's shares are up 46% year to date despite the sharp reduction in
earnings
guidance thus far in F01. PHTN is currently trading at 31x our CY02 EPS
estimate of $0.89, which is in line with a group of selected display
companies
and capital equipment companies. Given our expectations for an acceleration
in bookings later this year and a strong earnings recovery in 2HF02, we
believe the stock could reach $38-$40 over the next 12 months, particularly
as
investors focus on the bright outlook for FPD demand over the next two
years.
Investment Opinion
We are resuming coverage of Photon Dynamics with a Buy rating. PHTN is a
leading supplier of yield management solutions to the flat panel display (FPD)
industry. Capital spending among many of the major Asian FPD producers fell
off
sharply in late CY00, due to temporary excess capacity conditions and
uncertainty about next-generation glass panel sizes. In recent months, we
believe a combination of strong demand for FPDs and the conversion of older
FPD
capacity to small panel applications, has set the stage for a recovery in
capital spending in CY02. As a leading supplier of test, repair and
inspection
equipment to the FPD industry, we believe PHTN will be a prime beneficiary of
the next major FPD capital spending buildout, which we believe will get under
way in CY02. At the same time, PHTN's acquisitions of CR Technologies, Image
Processing Systems and most recent acquisition of Intelligent Reasoning
Systems,
have opened up new growth opportunities in the electronics packaging and
cathode ray tube and glass markets, which should help partly offset the
cyclical
nature of the FPD capital equipment business. While we are forecasting losses
for PHTN over the next three quarters, we believe bookings bottomed in the
March
quarter and will show steady improvement over the balance of CY02. While
PHTN's shares are clearly not inexpensive measured against our F02 EPS
estimate,
we believe the valuation is reasonable given the earnings power of the company
in the cyclical upturn, which we expect in CY02.
Company Overview
Founded in 1986, Photon Dynamics designs, manufactures and markets yield
management tools for manufacturers of flat panel display (FPDs). The
company's
customers include most of the largest manufacturers of FPDs in Japan, Korea
and
Taiwan. PHTN's products include electrical test, repair and inspection
equipment that identify defects early in the manufacturing process, enabling
FPD
makers to improve yields by repairing the panels before moving to the next
stage of production. Compared to the semiconductor industry, the FPD industry
is a relatively young industry that in recent years gained significant
momentum
with the steady decline in panel prices. Unlike the semiconductor industry,
where the materials make up a relatively small percentage of finished
electronic
product costs, the materials in an FPD account for the overriding cost of the
display. Thus, yield management, which is vital to the semiconductor
industry,
is as important and even more critical in the case of the FPD industry. We
regard PHTN as one of the leading suppliers of yield management tools to the
FPD
industry.
In November 1999, PHTN acquired CR Technology, a supplier of advanced X-ray
and
optical inspection to the printed circuit board (PCB) industry. CR Technology
addresses the emerging market for automated in-line inspection equipment for
PCB
assemblies. Earlier this month, PHTN announced an agreement to acquired
privately held Intelligent Reasoning Systems, which manufactures automated
optical inspection (AOI) equipment for the electronic manufacturing services
and
high-density interconnect markets. Looking out over the next several years,
we
believe there are excellent growth opportunities for PHTN in assembly
inspection.
In December 2000, PHTN acquired Image Processing Systems (IPS), a leading
supplier of automated display inspection and alignment systems to the cathode
ray tube (CRT) and automotive glass industries. For the most recent F3Q, the
company's FPD business accounted for 50% of revenues, with CR Technologies and
IPS representing 30% and 20%, respectively.
Transition To FPDs On The Desktop And Proliferation Of Small Displays Drive
FPD
Market Growth
The FPD market is expected to grow at a compound annual rate of nearly 28%
from
$12 billion in CY98 to $40 billion in CY03, according to the research firm
Display Search. Catalysts to the FPD market include the transition under way
from traditional CRT monitors/televisions to FPD displays, the growth of the
mobile communications market, the proliferation of personal digital assistants
(PDAs) and other hand-held devices and growing demand in other areas such as
digital cameras/camcorders, portable DVDs and on-board navigation systems in
automobiles. In fact, in virtually every facet of daily life, FPDs are
revolutionizing how people view image and data. Indeed, we regard the market
for large-size FPDs and small hand-held displays as one of the few bright
spots
in technology over the last year.
According to DisplaySearch, LCD monitors are forecast to surpass CRTs in CY04
and represent 54% of the total display market in CY05.
Concerns About Excess Industry Capacity Ease As FPD Price Declines Spur End
Demand
While there have been concerns about excess capacity in the industry, we
believe
the sharp decline in FPD average selling prices ($400 for some 15-inch FPD
monitors) coupled with redeployment of unprofitable manufacturing capacity (at
these lower prices) to smaller display applications have set the stage for a
recovery in capital investment by the major FPD manufacturers in CY02. We
believe PHTN is well situated to benefit from the expected upturn in the
market.
With FPD fab utilization rates in Asia having increased to over 75% and the
outlook for unit demand remaining healthy despite the generally weak
environment
for PC sales, we expect leading industry bellwethers such as Samsung and LG
Philips to move forward with plans to ramp production of larger glass panel
substrates (1 x 1.2 meters square). We believe orders associated with the
large
glass panel production could materialize during the September and December
quarters. At the same time, the Japanese manufacturers have been converting
some of their unprofitable capacity to low temperature polysilicon (LTPS) for
smaller panel applications, which requires equipment retooling. PHTN is
currently working with customers for LTPS applications. We believe LTPS will
be
a significant opportunity for PHTN. Indeed, DisplaySearch is forecasting that
50% of spending in FPD equipment will be deployed for LTPS in CY02.
PHTN's FPD Business Outlook
Through the first nine months of F01, PHTN's FPD equipment sales totaled $36.1
million, which includes approximately $6.1 million for the most recent F3Q.
As
a result of weak order patterns over the last two quarters, we expect FPD
equipment revenues to bottom in the current quarter at around $5.2 million,
which would bring full-year FPD revenues to $41.3 million. With the expected
pickup in bookings over the next two quarters, we expect FPD revenues to
rebound
to $47.4 million in F02.
First Call Corporation, a Thomson Financial company.
All rights reserved. 888.558.2500
Symbols:
US;PHTN
19-Jul-2001 19:49:06 GMT
Source FC - First Call Research Notes |
