GS US SEMI EQUIP WEEKLY: VIEWS ON
THE STOCKS POST OUR WEST COAST
TRIP
Summary: (1) Where do we go from here on the stocks? No change to our view that it is
too late in the cycle to be overweight the stocks with a 6-9 month view and there isn't
enough data to take a more aggressive trading stance on the stocks heading into the
seasonally stronger second half. Therefore, we would continue to avoid buying the stocks
for a trade as well, (2) Expect Entegris to report a solid quarter on Thursday, we view the
stock as an attractive hedge against pure capacity- driven names which we continue to
expect to perform no better than in- line with the market, (3) May book-to-bill (reported
Thursday night) expected to remain flat at 1.14, and (4) News, events and price
performance.
WHERE DO WE GO FROM HERE ON THE STOCKS? NO CHANGE TO OUR
VIEW THAT IT IS TOO LATE IN THE CYCLE TO BE OVERWEIGHT THE
STOCKS WITH A 6-9 MONTH VIEW AND THERE ISN'T ENOUGH DATA TO
TAKE A MORE AGGRESSIVE TRADING STANCE ON THE STOCKS HEADING
INTO THE SEASONALLY STRONGER SECOND HALF. THEREFORE, WE
WOULD CONTINUE TO AVOID BUYING THE STOCKS FOR A TRADE AS
WELL. We spent most of last week on the west coast, visiting with semi and semi
equipment companies. Our meetings provided no change to our view that it is too late in
the fundamental cycle to be overweight the semi equipment stocks. On many metrics, we
are at the very least entering the later stages of the current cyclical upturn. Whether it be
our favorite metric of normalized EBITDA margins (Applied currently stands at 31%
EBTIDA vs. our 18% normalized estimate), or macro metrics such as the number of
quarters we have spent above the IC unit trendline in this cycle (we are entering our 4th
quarter of above trendline semi units in this cycle compared to only 6 quarters in the 2000
cycle when end-demand was much more robust and we wound up building up massive
amounts of excess inventory) or finally the spread between year-over year semi revenue
growth and semi capex growth (which we use as a proxy for the amount of excess
capacity being added in any given year), which stands at a record-tying worst -35% in
2004. While semi equipment management's continue to be extremely bullish regarding
the prospects for the remainder of 2004 and 2005, we respectfully discount their
comments as semi equipment companies are too far down in the food chain to be used as
a leading indicator for demand. Just as management's were bullish too long into the
upturn in 2000 and even the headfake cycle of 2002, we believe they will remain bullish
even as fundamentals start to tail off in late 2004/early 2005 in this current cycle.
Regarding the stocks, while we are very comfortable with our view that 2005 will prove
to be a disappointing year for the stocks as the cycle comes to an end, we believe the
near-term trading call on the stocks is more difficult. How will stocks act during a period
when we are likely to get seasonally stronger data points but cyclical weaker data points
(i.e. declining capacity utilization rates at the foundries in H2'04)?
As we said, while we believe the trading call is a lot trickier than the cyclical call, we
believe that the short-term trading direction of stocks will continue to be dictated by
near-term order patterns. We continue to believe that Q3 order patterns are not enough to
drive the stocks higher so the many investors who own the semi equipment stocks for a trade are
relying on Q4'04 orders reaccelerating in order to justify owning the stocks. Our call for the last
several months has been that there is no visibility one way or the other on Q4'04 orders and
therefore there is no reason to own the stocks for a trade. We have no change to that view post our
meetings last week. Most companies don't even have great visibility yet on Q3 orders, let alone Q4
orders. While all managements are hopeful that the seasonal pickup in end-demand will stimulate
another wave of orders from the chipmakers in Q4'04, we continue to recommend that investors
wait to gather more fundamental data before taking a more aggressive trading stance on the stocks.
EXPECT ENTEGRIS TO REPORT A SOLID QUARTER ON THURSDAY, WE VIEW THE
STOCK AS AN ATTRACTIVE HEDGE AGAINST PURE CAPACITY-DRIVEN NAMES
WHICH WE CONTINUE TO EXPECT TO PERFORM NO BETTER THAN IN-LINE WITH
THE MARKET. Entegris is reporting earnings on Thursday before the market open. We model
third fiscal quarter (ending May) sales of $89.5 million, up 12% sequentially, with earnings per
share of $0.09, versus the Street consensus earnings per share estimate of $0.10. Our mid-quarter
checks indicated that business was tracking at least in-line with expectations for the quarter. We
would expect management to highlight that sales during the quarter were driven by strength in its
capital spending related businesses, which tend to be correlated with semi equipment shipments.
Recall that Entegris' OEM customers (i.e. Applied, TEL, and FSI) place orders for Entegris'
products about 4-6 weeks prior to the scheduled shipment date for a particular tool. We believe
Entegris benefited from the significant increase in semi equipment shipments during the quarter.
Recall that some OEMs shipments increased by 30% or more last quarter so this trend supports
strong fundamental growth at Entegris.
Regarding guidance, we believe that the company will be somewhat conservative in its outlook.
Semi units, which drive about 60% of the company's business, have increased 10% m-m over the
last 20 years in June and then have declined 4% m-m in July and 3% m-m in August. On the capital
spending side, which drives about 40% of the company's business, our checks indicate that semi
OEM shipments are likely to be up slightly in the September-quarter. We would therefore expect
Entegris to guide for mid- single digit sequential revenue growth for its fourth fiscal quarter. While
we continue to believe that it is too late in the fundamental cycle to be overweight the semi
equipment stocks, we believe that small cap investors who must maintain some exposure to the
group should consider owning a name like ENTG given that its wafer-start driven business should
hold up better as capital spending momentum slows. While ENTG has ourperformed the broader
sector YTD (ENTG is down 11% YTD while the median stock in our coverage universe is down
16% YTD), it has underperformed some of the other wafer start driven names, like ATMI, which
has been one of the better performing stocks in our coverage universe, up 10% YTD. Therefore,
we believe that ENTG has room for continued some outperformance relative to its peer group as
we move into H2'04.
Finally, as we highlighted last week following several meetings with semi and semi equipment
companies in Silicon Valley, we believe that an emerging theme in the industry is diversification
into non-semiconductor related business in order to reduce the inherent volatility in the semi
equipment business. Entegris has been focused on this initiative for some time and we would
expect the company to continue to highlight its efforts in its non- semiconductor related businesses,
including the life sciences, data storage, and fuel cell markets.
MAY BOOK-TO-BILL EXPECTED TO REMAIN FLAT AT 1.14 ON 5% M-M ORDER
GROWTH AND 5% M-M SHIPMENT GROWTH. Semiconductor Equipment and Materials
International (SEMI) is releasing the May US equipment manufacturers' book-to-bill data on
Thursday evening (6pm eastern). We are estimating a flat book-to-bill ratio in May, on 5% m-m
growth in orders and 5% m-m growth in shipments. We are modeling three-month rolling average
overall orders of $1,680 million (+ 5% month-over-month) and overall shipments of $1,470 million
(+5% month- over-month). We estimate front-end shipments of $1,150 million (+5% monthover-
month) and front-end orders of $1,300 million (+5% month-over-month), yielding an
estimated front-end book-to-bill ratio of 1.13. We estimate back-end shipments of $320 million
(+5% month-over-month) and back-end orders of $380 million (+5% month-over-month), yielding
a back-end book-to- bill ratio of 1.19. We continue to emphasize that the book-to-bill is a
backward looking and unaudited metric and should therefore not be a significant trading event for
the semi equipment stocks.
News, Events and Price Performance
Last week
Monday 7 June (1) Cymer announced that it expects it second quarter revenues to increase to the
lower half of the company's guidance range (+5% to +7% sequentially) while gross margins are
expected to increase to the upper end of its guidance range (previous guidance called for gross
margins of 42% to 46%). (2) Tes
sera Technologies raised its second quarter guidance. The company now expects revenues of $16.6
million to $17.0 million and earnings per share of about $0.16. This compares to earlier guidance
for revenues of $12.8 million to $13.2 million and earnings per share of $0.09.
Tuesday 8 June (1) Applied Materials received the X Initiative's 2004 Design-to-Manufacturing
Catalyst Award. The X Initiative (a semiconductor design-chain consortium consisting of more
than 40 member companies) selected Applied Materials for its contributions in developing
advanced manufacturing proof points using the X Architecture.
Wednesday 9 June (1) Therma-Wave announced that it received a repeat order from a European
semiconductor manufacturer for multiple Opti-Probe systems, which will be used to support several
fabs in Asia. (2) AKT, an Applied Materials company, introduced the AKT-4K Electron Beam
Array Tester (EBT) for pixel array testing of TFT-LCD panels on seventh generation substrates.
(3) Teradyne announced that Harman Music Group has selected the Teradyne XStation HS
automatic X-ray inspection system for transmission X-ray testing.
Thursday 10 June (1) Mykrolis appointed Peter S. Kirlin to Vice President of Business
Development. Prior to this appointment, Mr. Kirlin served as CEO and Chairman of the Board for
Dupont Photomasks. He also previously held management positions at ATMI and American
Cyanamid Corporation.
This week's calendar:
Thursday 17 June: (1) Entegris (ENTG-$11; IL/N) reporting earnings. GS $0.09; Street $0.10. (2)
SEMI US equipment manufacturers' May book-to-bill release. GS estimate 1.14.
GS Universe Price Performance 6/10/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 15 0% 0% -25% -41% 6%
AMAT Applied Materials IL/N 19 1% -5% -11% -16% 20%
ATMI ATMI Inc. IL/N 26 0% 1% -2% 11% 6%
ACLS Axcelis Technologies IL/N 12 0% -3% 5% 14% 85%
BRKS Brooks Automation IL/N 19 -2% -10% -12% -22% 66%
CMOS Credence Systems U/N 13 0% -6% 11% 0% 50%
ENTG Entegris IL/N 11 4% 1% -10% -11% -14%
FORM FormFactor OP/N 20 5% 5% -6% -1% N.A.
KLAC KLA-Tencor OP/N 46 0% -4% -8% -21% -4%
LRCX Lam Research IL/N 24 0% -3% -3% -25% 36%
MKSI MKS Instruments IL/N 22 -4% -7% -10% -25% 24%
NVLS Novellus Systems IL/N 31 0% -6% -1% -26% -16%
TER Teradyne Inc. U/N 21 2% -5% -11% -16% 23%
Mean -- -- 1% -3% -6% -14% 23%
Median -- -- 0% -4% -8% -16% 21%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect my
personal views about the subject company or compani |
