SSB :
Electro Scientific Industries (ESIO)
ESIO: Preannounces Downside to 3Q02(Feb) 3H (Underperform, High
Risk)
Mkt Cap: $474.5 mil.
February 19, 2003 SUMMARY
* ESIO announced that it expects revenues for
SEMICONDUCTOR EQUIPMENT 3Q03(Feb) to be between $35-38M (down 12-19% q/q)
Glen Yeung versus consensus estimates of $42.5M. Previous
guidance had been for flat to slightly down
revenues. Excluding special charges, loss per
Karen Wang share is expected to be $(0.04)-(0.06).
* ESIO attributed the miss to general weakness in
its business, with no one particular customer or
Melissa Lopez business unit accounting for the decline.
* Pricing pressure and low absorption at these
revenue levels is putting further pressure on gross
margins.
* Restructuring activities related to its Escondido
facility remain on track.
* The company will report earnings on March 20th.
* Reducing estimates: 3Q03(Feb) EPS to $(0.05),
FY03 EPS to $(0.04), FY04 EPS to $0.47
* We Overweight the semiconductor equipment industry.
FUNDAMENTALS
P/E (5/03E) NA
P/E (5/04E) 36.4x
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) $161.3 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 (2/14/03) $17.13 Current Rating 3H
52-Week Range $38.25-$13.51 Prior Rating 3H
Shares Outstanding(a) 27.7 mil. Current Target Price $22.00
Convertible No Previous Target Price $22.00
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 $0.03A ($0.05)E ($0.02)E ($0.04)E
Previous $0.01A $0.03A $0.04E $0.05E $0.12E
5/04E Current $0.02E $0.05E $0.17E $0.23E $0.47E
Previous $0.07E $0.11E $0.17E $0.23E $0.58E
5/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 5/03E $0.15; 5/04E $0.70; 5/05E $0.00
Calendar Year EPS: 12/02E ($0.08); 12/03E $0.00; 12/04E NA; 12/05E NA
OPINION
Electro Scientific Industries
Rating: 3H
Report Date: March 20, 2003
(M except EPS) 3Q03 (Feb) E Street 3Q02 (Feb) A 2Q03 (Nov) A
Revenue $37.0 $42.52 $36.4 $43.3
Gross Margin 44.5% 46.7% 46.4%
Net income ($1.3) ($2.2) $0.8
Diluted Shares 27.8 28.1 27.7
EPS ($0.05) $0.04 ($0.08) $0.03
Preannounces Downside to the Quarter. ESI announced that its 3Q02(Feb)
revenues are expected to be in the range of $35-38M, for a sequential
quarterly decline of 12-19%. Loss per share excluding charges is expected to
be $(0.04)-(0.06). Street consensus estimates are for revenues of $42.5M and
EPS of $0.04.
General Weakness Across Segments. ESI noted that business was weak across
all segments, with no one particular business or customer accounting for the
shortfall. We believe that the company is seeing pricing pressure across its
various business segments (with SPG experiencing relatively less due to its
market share position) and this, combined with lower factory absorption,
continues to place pressures on gross margins. On a segment basis, we
believe that yield improvement will be down q/q after showing 3 straight
quarters of sequential growth, consistent with the company's guidance that
this business would be moderately down. This includes slower business from
Samsung, who had been a strong source of orders in October. We believe the
vision business will show sequential growth in the quarter as ESI benefited
from a large order announced by major customer Kulicke and Soffa (Not Rated)
in December; however, this was not enough to offset lower revenues from other
segments.
Lowering Estimates. As a result of lowered revenues expectations, and
continued pressure on gross margins due to absorption and pricing issues, we
are reducing our estimates as follows:
* 3Q03(Feb) EPS to $(0.05), revenues to $37.0M
* FY03 EPS to $(0.04) from $0.12, revenues to $161.3M from$172.3M.
* FY04 EPS to $0.47 from $0.58, revenues to $202.0M from$210.0M.
ESIO will hold its 3Q03(Feb) conference call on March 20th to discuss its
results. The company tends to have a back end loaded quarter, and as such,
actual segment performance can vary.
Cost Cutting remains on Track. The company indicated that its restructuring
activities related to the consolidation if its Escondido, California
facilities remain on track. ESI has reduced headcount to its targeted level
of 700 employees by the end of the third quarter. These moves are expected
to take out $8M in annualized costs with savings.
VALUATION
Our price target of $22 reflects a 1.7x multiple to book value which
corresponds to the company's trough valuation in 2001 and is slightly below
ESI's historical average price to book multiple of 1.8x. We have taken a
discount to average book value to reflect ESIO's dependence on memory
spending, which can be volatile due to its dependence on memory pricing, and
overall electronics demand, which historically has grown at a slower rate
than the semiconductor equipment industry. ESI's trough book value was 1.0x
in 1998 and 1.2x, in 1996. It is currently trading at 1.4x book. While we
recognize that our target represents appreciable upside from the stock's
current level, we continue to rate ESIO Underperform as the stocks within our
coverage industry are expected to increase by a greater percentage on
average.
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 Over Weight
rating on the semiconductor equipment industry. We Over Weight the
semiconductor equipment group based our view that the major single piece of
negative news for 1Q03, Intel's capex reduction, is now reflected in prices
and has created more interesting risk reward profiles for the equipment
names. We believe our expected 5%-15% increase in 1Q03 orders sets the
conditions for equipment stocks to move higher in the near-term. We rate ESI
Underperform due to its lower exposure to the capital spending cycle (it is
predominantly leveraged to memory spending) and greater dependence on overall
electronics demand. We believe 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, in our view, 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. |
