From Merrill Lynch. I found the reference to Novellus taking copper leadership from AMAT notable: AMAT was also rated 1-1.
Novellus – 1 March 2002
(Continued)
2
1Q Outlook Update
1Q Revenue Guided Up $150m to $150-$160
1Q Shipments Guided Up $130m to $134m
1Q Earnings Guided Up ($0.10) to ($0.09)
1Q Orders Guided Up $130m to $130-$150
But 1Q Gross Margin Guided Down
First quarter revenues and earnings rise…
In a very positive mid-quarter update, Novellus increased
its first quarter forecast for revenues from $150 million to
$150 to $160 million (above our estimate of $140 million)
and slightly increased its forecast for first quarter earnings
from ($0.10) to ($0.09), in-line with our estimate.
…but gross margins hurt by SAB 101 effect
During the first quarter the company will record revenues,
as per SAB 101, from a number of previously shipped
300mm systems. Since these systems were initially
manufactured and shipped early in their product life cycle,
their associated gross margins are lower than the company
average. Therefore, the company’s blended gross margin
in the first quarter is expect to fall several hundred basis
points below our previous 46% estimate. We now
estimate the 1Q gross margin will be approximately 43%.
While the high costs of these initial 300mm systems is
negatively affecting the gross margin, we believe it should
be noted that the fact that these systems are being accepted
earlier than expected illustrates their production worthiness
in the customer’s fabs and is positive testament to their
quality.
1Q order upside driven by US and Asian demand
First quarter net orders are now projected to be between
$130 million and $150 million, above the original order
forecast of $130 million. Our estimate was $130 million.
Order strength in the first quarter was driven by copper
and 300mm demand from top tier customers in North
America and Asia (ex Japan). Additional demand in the
quarter came from China for 200mm systems.
Quote activity broadening
While an estimated 80% of 1Q bookings are concentrated
among top 10 customers, quote activity in the quarter has
expanded to a broad list of customers. In particular, quote
activity from the DRAM manufacturers greatly increased
during the quarter, as DRAM prices firmed, which could
lead to significant orders over the next several quarters.
Accelerating back towards breakeven: increasing
estimates for 2002
Given the higher revenue run rate (despite lower near term
margins) we are increasing our 2002 EPS estimate from
$0.00 to $0.02. The company stated it could possibly
return to profitability in the 2Q if the current order pattern
continued but we have decided to take a more conservative
stance and estimate 2Q earnings at ($0.02), up from
($0.04). We anticipate 2Q margins will once again be
affected by SAB 101 rules that enable the company to
record 80% of revenues upon shipment but require the
company to record 100% of costs. We estimate this SAB
101 revenue drag will continue for a few more quarters
until it becomes normalized.
Table 1: Estimate Changes
Revised Estimates
Current
EPS
Previous
EPS
Current
Revenue
Previous
Revenue
1QE Mar ($0.09) ($0.09) $150 MM $140 MM
2QE Jun ($0.02) ($0.04) $160 MM $150 MM
2002E $0.02 $0.00 $695 MM $675 MM
Source: Company Reports, Merrill Lynch Estimates.
Market position strengthened during down turn
We believe Novellus is doing quite well on the design win
front. Novellus appears to be gaining share across two of
its product lines (electrofill, and PVD seed & barrier) and
continues to have a very strong position in dielectrics. We
believe the company has recently displaced Applied
Materials (AMAT: C-1-1-9, $43.48) as the copper
deposition (electrofill) equipment supplier to ST
Microelectronics. In addition, we continue to hear positive
news about the company’s penetration on copper and
certain dielectrics at both Intel and IBM, two of the few
customers actually ordering for 300mm and copper right
now.
Investment Opinion
We believe comments made in today’s mid-quarter update
clearly illustrate that the fundamentals for Novellus’
business are improving and this should be a catalyst for the
stock. Novellus continues to trade at a discount to its peers
on a price to book basis (3.4x versus 4.3x), which should
provide for limited downside. We believe the downside
risk to the stock in the current environment with improving
fundamentals is likely 25% above trough valuation or 2.8x
book or $35. On the potential upside, we believe the stock
could return to a valuation, based on the run-rate leaving
2003, that provides upside to $55 within 12 months. Long
term we believe the valuation potential is even greater as
order momentum continues to build through the next
several quarters and the company continues to gain market
share. Therefore, we maintain our STRONG BUY rating.
fred |
