Updated SSB:
Electro Scientific Industries
(ESIO) 3H (Underperform, High Risk)
ESIO: Announces Cost Cutting Stock ratings are relative to analyst's
Initiatives industry coverage universe
Mkt Cap: $453.7 mil.
October 2, 2002 SUMMARY
* ESI announced that it will relocate manufacturing of
SEMICONDUCTOR its electronic component systems to its Portland,
EQUIPMENT Oregon facility (from Escondido CA), with the move to
Glen Yeung be completed by year end. Current facility will be
sold.
* Headcount reduction of 100 employees and relocate 45
Karen Wang employees; ESI will take a $9M charge in current qt and
$2M for relocation in upcoming quarters. Company
expects to save ~$8M annually, beginning 3Q02(Feb).
* Orders for semi yield improvement were strong in
first month of the quarter suggesting Samsung is
placing orders for Line 12.
* No change to guidance for the quarter - revenues of
$42-44M, flat with F1Q03 levels, and EPS in the range
of $0.02-0.04. Guidance for BB was 1.0x, implying
order growth in excess of 29%.
* Expect stocks under pressure near-term but to perform
better as evidence of order bottom emerges in 4Q02. We
maintain our Overweight of sector.
FUNDAMENTALS
P/E (5/03E) 182.0x
P/E (5/04E) 29.3x
TEV/EBITDA (5/03E) NA
TEV/EBITDA (5/04E) NA
Book Value/Share (5/03E) NA
Price/Book Value NA
Dividend/Yield (5/03E) NA/NA
Revenue (5/03E) $171.0 mil.
Proj. Long-Term EPS Growth 20%
ROE (5/03E) NA
Long-Term Debt to Capital(a) NA
ESIO is in the Russell 2000(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (10/1/02) $16.38 Current Rating 3H
52-Week Range $38.25-$14.13 Prior Rating 3H
Shares Outstanding(a) 27.7 mil. Current Target Price $28.00
Convertible No Previous Target Price $28.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
5/02A Actual ($0.10)A ($0.01)A ($0.08)A ($0.03)A ($0.23)A
5/03E Current $0.01A $0.02E $0.03E $0.03E $0.09E
Previous $0.01A $0.02E $0.03E $0.03E $0.09E
5/04E Current $0.05E $0.11E $0.17E $0.23E $0.56E
Previous $0.05E $0.11E $0.17E $0.23E $0.56E
5/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 5/03E $0.17; 5/04E $0.81; 5/05E NA
Calendar Year EPS: 12/02E $1.32; 12/03E ($0.09); 12/04E $0.22; 12/05E NA
OPINION
Consolidating Facilities to Improve Profitability. Electro Scientific
Industries announced that it will relocate manufacturing of its electronic
component systems to its Portland, Oregon facility (from Escondido CA). The
move is expected to be completed by year-end. The land and building in
Escondido will be sold. The company indicated that the closure is not a
reflection of the relative utilization rate of its components business.
In conjunction with this move, the company will reduce headcount by 100
employees and relocate 45 employees. As a result ESI will take a $9M charge
for severance in the current quarter and ~$1.5M for relocation in its fiscal
third and fourth quarters.
Implications for Other Equipment Names. ESI has seen orders for their DRAM
repair tools come in earlier than they expected. These tools are 300mm and
are geared for Infineon and Samsung's Line 12. ESI believes order activity
is apt to remain at these levels for the next 1-2 quarters suggesting that
Samsung is moving forward with orders for its Line 12. We note that Samsung
is currently deciding with whom they will place orders they have been
negotiating for several weeks. We believe ESI's commentary confirms that
these orders will be placed. Based on this, we believe our order
expectations of down 20-25% may be the low-end of the range of guidance for
most companies as it anticipated weakness from Samsung. We note however,
that order reductions from other chipmakers, most notably TSMC and UMC, are
likely to sustain the general decline albeit at a 10-20% rate of decline. We
are now monitoring whether 4Q02 will represent the bottom given Samsung's
plans. We note that Samsung has previously indicated that 2003 capital
spending will be up ~20% but we are reluctant to accept this figure at face
value at this stage.
No Change in Outlook. Company indicated there is no change to outlook for
the current quarter. We note guidance from the company's Sept earnings call
was for 2Q03(Nov) revenues of $42-44M, flat with F1Q03 levels, and EPS in the
range of $0.02-0.04 before restructuring charges. Guidance for BB was 1.0x,
implying order growth in excess of 29%.
As a result of this consolidation, the company expects to save ~$8M annually,
starting in the third fiscal quarter. Breakeven is expected to decline to
$37-38M by 4Q03(May). We are not revising our estimates at this time to
reflect conservatism in our outlook. We note that ESI has a high degree of
operating leverage in it current operating model, and these moves are apt to
increase the leverage in the model as the cycle recovers.
VALUATION
At $16.20 ESIO is trading at 1.25x book, nearing its 1996 trough level of
1.24x, versus its historical range of 0.4--7.4x. Our target of $28
reflects a 2.2x multiple to book value of $13 per share. This multiple of
book value is the historical (1990-2002) average price to book for ESIO.
RISKS
* Cyclicality in the semiconductor equipment business is a function of
the long lead times to build a fab (18 to 24 months) and the commodity
nature of certain devices. Fab projects are often begun without a
clear picture of future profitability due to device price
fluctuations. As a result, periods of high investment are often
followed by periods of extremely low investment as chipmakers are
forced to reassess spending patterns against changes in expected
profitability.
* Capital investment patterns of semiconductor makers are highly
dependent on pricing and demand. Significant near term issues include
weak demand for semiconductors and goods that consume semiconductors,
in particular PCs (which account for half of all semiconductors
produced). Overall health of the economy will also factor into the
decision as a poor economic outlook will cause corporate IT spending
to be pushed out.
* While several chipmakers have committed to capital spending budgets
for the year and have ordered based on these budgets, there exists a
risk that budgets are reduced and orders cancelled as slower demand
results in less of a need to add capacity
* ESI, in particular, derives its revenue from 5 different businesses.
While the company has leading market share in many of these areas, the
small size of these markets (making the achievement of critical mass
difficult) does not always help to offset potential market volatility.
This creates the risk of misses in any given division in any given
quarter.
INVESTMENT THESIS
ESI has large and defensible market shares in three core markets--DRAM repair
(85% share), laser trimming systems (50%), and capacitor test and termination
equipment (60%). As such, ESI is exposed to the dramatic upside potential
inherent in these cyclical end markets. In addition to these strong
positions ESI is also targeting the market for high density interconnect
solutions. The ability to more closely pack electronics devices on a printed
circuit board is a critical enabler to smaller, enhanced-functionality
products. ESI's microvia drilling, miniature capacitor production equipment,
laser trim, and machine vision businesses are all beneficiaries of the trend
to smaller and denser PCB interconnects. ESI has successfully leveraged the
company's core competencies and global infrastructure to enter new growth
markets through acquisition or internal development. These include:
capacitor manufacturing equipment, video pattern and optical character
recognition.
COMPANY DESCRIPTION
Electro Scientific Industries, based in Portland, Oregon, is a manufacturer
of precision production equipment to the broad electronics industry. ESI is
the leading supplier of advanced laser systems used to adjust (trim)
electronic circuitry and improve the yield of semiconductor memory devices.
The company also produces high-speed test and termination equipment used in
high-volume production of miniature capacitors. Additionally, ESI produces
machine vision products and electronic packaging systems for manufacturers of
printed circuit boards, electronics and other products.
ANALYST CERTIFICATION
I, Glen Yeung, hereby certify that the views expressed in this research
report accurately reflect my personal views about the subject company(ies)
and its (their) securities. I also certify that I have not been, am not, and
will not be receiving direct or indirect compensation in exchange for
expressing the specific recommendation(s) in this report.
Ratings and Target Price History
Analyst: Glen Yeung (covered since Jun 5 2000)
------------------------------------------
Target Closing
Price Price
Date Rating (USD) (USD)
------------------------------------------
31 Jan 00 1H *51.50 40.06
15 Mar 00 Coverage suspended
5 Jun 00 *1H *67.00 52.56
3 Nov 00 1H *46.00 33.50
5 Dec 00 1H *37.00 24.75
13 Dec 00 *2H 37.00 22.63
18 Sep 01 2H *30.00 22.39
10 Dec 01 2H *35.00 32.99
15 Jul 02 2H *28.00 22.87
6 Sep 02 Stock rating system changed
6 Sep 02 *3H 28.00 18.27
------------------------------------------
*Indicates change.
Chart current as of 17 September 2002 |
