Smith Barney Citigroup "Color" (AMAT, KLAC, DPMI, PLAB, BRKS, NVLS, CMOS, LTXX, TER, LRCX, WFR, AMKR, INTC) JagNotes.com
2 June 2004, 08:36am ET
AMAT: Assuming Coverage And Lowered Rating To Hold - Assuming coverage and lowering rating to Hold (2H) and target price to $23. While signs of a cyclical top are starting to materialize, we believe the process will not fully play out until mid-CY2005 - for now, we prefer late-cycle or derivative plays with attractive valuation. AMAT at current levels does not meet our criteria.- AMAT is now reaping the benefits of down-cycle cost structure improvements to boost profitability. A leader in virtually every market it serves, AMAT`s challenges are to maintain market share while finding new revenue growth opportunities.- Key issues for the stock include: 1) Top-line growth opportunities (at respectable gross margins), 2) copper deposition (particularly ECD) market share, and 3) use of nearly $6B in cash and equivalents and potential longer-term impacts on valuation.
KLAC: Assuming Coverage And Lowered Rating To Hold - Assuming coverage and downgrading to a Hold (2H) rating and lowering our target price to $51 from $73.While we see signs of a cyclical top starting to materialize, we do not expect the process to fully play out until mid-CY2005 - at this juncture, the only stocks we like are late-cycle/derivative plays or those with attractive valuations. KLAC at current levels does not meet our criteria.- As the top provider of yield-enhancing process control equipment, KLAC may be the best positioned company we cover over the longer-term given our view that yield issues at the 65nm node will be at least as acute as at 130nm. That said, we like the stock as a potential hedge for those investors who need exposure to the group even in a downturn - thus we would wait a Q or two.- By our analysis, key issues for the stock include: 1) increasingly wide ranges in order guidance, 2) expansion of served markets/revenue opportunities, and 3) competition at lower price points.
DPMI: Initiate Coverage With A Buy - Initiating coverage with Buy (1S) rating and $30 price target. While signs of a cyclical top are starting to materialize, we estimate the process will not fully play out until mid-CY2005 - in the meantime we prefer late-cycle or derivative plays with attractive valuation, and DPMI fits the bill.- With share loss and bad acquisitions behind us, DPMI is in the middle of an operational turnaround that our analysis indicates provides an attractive risk/reward scenario for patient investors.- While low current valuation may be justifiable given profitability issues, we note that our EPS estimates are more than double consensus in C05 - we estimate that when numbers turn they will turn fast, and we prefer to be early.- Key issues for the stock include: 1) the need to execute on the plan for return to profitability, 2) the ability to leverage solid leading-edge market share into operational gains, and 3) secularly slowing merchant mask shop growth.
PLAB: Initiate Coverage With A Hold - Initiating coverage with Hold (2H) rating and $18 price target. While signs of a cyclical top are starting to materialize, the process will likely take into mid-CY2005 to fully play out. In the meantime we prefer late-cycle or derivative companies with attractive valuation. PLAB, at current prices, does not fit this bill.- Photronics has established itself as the key low-cost merchant photomask provider to the semiconductor industry by prioritizing operational excellence and customer service. That said, our research indicates its successes have been largely priced into the stock, and see better risk/reward elsewhere.- Key issues for the stock include 1) relatively low market share in advanced technology photomasks, 2) secularly slowing merchant mask shop growth, and 3) potential issues in executing plans to better integrate the efforts of chip designers and manufacturers.
BRKS: Initiate Coverage With A Sell - Initiating coverage on Brooks Automation with Sell Rating (3S) and $17 price target, based on a 14x multiple to our estimated peak TTM EPS of $1.20 - our estimates are, on average, 14% below consensus in 2004 and 2005.- As the largest supplier of automation to chipmakers, BRKS appears well positioned as the transition to 300mm makes automation more critical.- BRKS` core tool automation position remains strong, however, the company`s lack of momentum in software and margin-anchoring AMHS add a lackluster sheen to the story.- Key issues for the stock include traction and profitability in AMHS, conversion of captive tool h/w market to merchant opportunity, and growth in software.- While we see the semiconductor cycle as fundamentally intact, we prefer late-cycle or derivative plays with attractive valuation, and see the risk/reward for BRKS at this level unattractive and the stock overvalued.
NVLS: Assuming Coverage And Lowered Rating To Hold - Assuming coverage and downgrading rating to Hold (2H) and lowering target price to $36. We see clear signs that a cyclical top is starting to materialize, but we also do not think the process will fully play out until mid-CY2005. In the meantime we prefer late-cycle or derivative plays with attractive valuation, and NVLS does not fit that bill.- While NVLS remains well positioned with key 300mm leaders (and thus big spenders like Samsung and Intel), we remain concerned that, with a clear decision to compete head-to-head with AMAT now made, NVLS will be forced to continue sacrificing margins to achieve strategic penetration in new markets like CMP and PVD.- Key issues for the stock include: 1) margins versus continued expansion into new markets with entrenched suppliers, 2) copper and PVD market share gains, and 3) accelerating new product development (i.e., CMP, ALD).
CMOS: Assuming Coverage With a Hold - Assuming coverage with a Hold (2H) rating (changed from 2S) and maintaining a $15 target price. While we see signs of a cyclical top starting to materialize, we expect the process to not fully play out until mid-CY2005.For now, we prefer derivative or late-cycle plays with attractive valuation - CMOS at current levels does not meet our criteria.- Our analysis suggests that, while the NPTest acquisition should be earnings neutral in the near term, there is potential for several cents per quarter accretion to bottom line at the peak of the cycle. Although an acquisition of this scale is usually fraught with difficulties, and the potential for operational missteps is large, our bias is positive and we look forward to seeing early positive results.- Key issues for the stock include: 1) NPTest acquisition, 2) improving cost structure, 3) overcrowding in the ATE market and further needed consolidation.
LTXX: Initiate Coverage With A Hold - We are initiating coverage on LTXX with a Hold rating (2H) and a $12 price target based on 14x our estimated peak TTM EPS of $0.88 (below Street given our dubious view of back-end growth potential). The only stocks we like are late-cycle/derivative plays or those with attractive valuation, and LTXX at current levels does not meet our criteria.- Checks suggest LTXX`s position at core customer TXN (58% of revs in F2003) is strong as ever and it is starting to diversify its customer base into Asia. This is our favorite stock in the semi-test space, however, we find better opportunity in fab-related names that are apt to grow faster in the coming quarters.- Key issues for stock remain LTXX`s diversification of concentrated customer base (TXN >50% of revs), traction of new high-end tester (HFi) for margin improvement, free cash flow generation from outsourcing initiative, and further consolidation of the overcrowded, price competitive ATE market.
TER: Assuming Coverage And Lowered Rating To Sell - We are assuming coverage of TER, downgrading the existing Hold rating to a Sell (3H), and reducing the price target from $30 to $20 as our "sum of the parts" analysis suggests the stock is currently overvalued.- We no longer see the back-end as "underbought" as wafer fab equip growth is likely to outpace test & assembly for remainder of cycle. We prefer late cycle or derivative plays w/attractive valuation - and TER fits neither bill.- TER maintains a strong position in semi test and is well leveraged to next-gen devices and IDMs/subcons alike. Considerable restructuring and strategic decision to jettison lower margin TCS business has injected operating leverage into the model, although much of this is now factored into current expectations.- Key issues for stock remain increased traction of new product pipeline, improved margins on non-semi test side, and further consolidation of the overcrowded, price competitive ATE market.
LRCX: Assuming Coverage With A Buy - We assume coverage of LRCX with a Buy rating (1H) and are reducing the price target from $40 to $35. Our new estimates are high on Street as we believe consensus still has not fully appreciated Lam`s operating leverage.- As the leader in the oxide etch market, we see Lam as a derivative play on a number of technology trends, including the migration to copper interconnects.- Lam`s customer base matches up well with incremental spenders in the coming quarters including AMD, Samsung, Infineon, and Japanese logic players (Sony, Toshiba) with opportunties at a key US chipmaker still on the horizon.- Key issues for the stock include diversification outside of etch, discontinuation of margin-anchoring CMP business, and keeping a lid on operating expenses.- While signs of a cyclical top are starting to materialize, we believe the process will likely take well into C2005 to fully play out - in the meantime, we prefer late-cycle or derivative plays with attractive valuation and LRCX fits the bill.
WFR: Assuming Coverage And Upgrading From Hold To Buy - We are assuming coverage of WFR, increasing the prior Hold (2S) rating to Buy (1H), lowering the risk profile from Speculative to High, and increasing the price target from $11 to $14.- While WFR is one of the purest plays on semiconductor units, the basis for our recommendation is a combination of growing market share, the industry`s lowest cost structure (that should enable profitability even in the downturn), and better commodity wafer pricing - even if short-lived - that makes consensus expectations look very conservative.- Key issues for the stock include duration of tight wafer supply, increased 300mm market share, expansion of customer base, and reduction of overhang.- While signs of a cyclical top are starting to materialize, we believe the process will likely take well into C2005 to fully play out
AMKR: Assuming Coverage And Upgrading From Sell To Hold - We are assuming coverage of Amkor, upgrading the rating from Sell (3S) to Hold (2S), and increasing the price target from $8 to $11.- AMKR is a leading provider of assembly & test services to the semiconductor industry, and is very close to a pure-play on chip units. Current favorable unit trends are providing a tailwind to AMKR, however, our analysis suggests that consensus expectations for the company remain too high.- The company continues to have a significant amount of debt, and while it has successfully refinanced some instruments, a tighter monetary environment coupled with a low stock price may increasingly back the stock into a corner.- Key issues for stock include expanding customer base (particularly in Taiwan and China), increasing test capabilities, and further cleansing of balance sheet.
INTC: Reit Buy - While bias is flat-to-up, we expect Intel to maintain mid-point of revenue guidance by tightening guidance range to $7.7B-$8.1B (from $7.6B-$8.2B) - China has shown some relative weakness in recent weeks and may create enough uncertainty to keep mid-point unchanged; we are encouraged by more recent signs that China may be coming out of this weak period and re-building inventory in light of solid PC-OEM outlooks - Company likely to have a positive bias to gross margin, reflecting inventory build in the quarter (typical build is 5%) - No change to revenue estimate, which remains above mid-point, pending further clarity on China--our estimates reflect 1.4% sequential decline, slightly below median 2Q revenue declines since 1994 (0.9%) - Continue to view Intel as the quality investment on an expected seasonal uptick for semiconductor stocks>>
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