ESIO: Announces Electronic Component Systems 3H (Underperform, High
Order Risk)
Mkt Cap: $680.0 mil.
November 21, 2002 SUMMARY
* ESIO's Electronic Component Systems group has
SEMICONDUCTOR EQUIPMENT received a two system order from Innochips
Glen Yeung Technology, for a visual test system and an
electrical test system. We estimate the order to
be worth ~$500K.
Wang, Karen * The systems are expected to ship in the current
quarter, adding to Innochips' installed base of
ESI tools at its Shiheung, Korea facility.
* ESIO indicated that demand for capacitor
production equipment remains subdued. We believe
semiconductor yield enhancement is seeing some
relative strength (driven by Samsung); continued
high utilization rates at the leading edge is
driving some demand for drills; and a moderate
seasonal build is driving a slight improvement in
the consumables business.
* The company noted that the current quarter (ends
November) is back end loaded, but no change to
guidance. We Marketweight the industry.
FUNDAMENTALS
P/E (5/03E) 272.8x
P/E (5/04E) 43.8x
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
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (11/20/02) $24.55 Current Rating 3H
52-Week Range $38.25-$13.51 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 $0.18; 5/04E $0.83; 5/05E NA
Calendar Year EPS: 12/02E $1.32; 12/03E ($0.09); 12/04E $0.22; 12/05E NA
Institutional Shareholder Services assigns this company a
Corporate Governance Quotient of 43.96, which means it
outperformed 43.96% of the companies in the S&P 600. For an
explanation of ISS's Corporate Governance Quotient, please refer
to www.isscgq.com.
OPINION
VALUATION
At $24.55 ESIO is trading at 1.90 book versus its historical range of 0.4-
-7.2x. 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. The company is trading at 4.20x sales.
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
We rate ESIO shares 3H (Underperform, High Risk) relative to our Marketweight
rating on the semiconductor equipment industry. We Marketweight equipment
names with the assertion that after dramatic out-performance, stocks will
likely be near-term range-bound as anticipation of an order bottom is
reflected in the stocks. We believe underlying concerns of chip and other
component makers regarding the sustainability of this strength is keeping
them from any aggressive spending. We therefore await firmer evidence of a
sustainable order uptick to revisit our sector rating.
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. |
