GS US SEMI EQUIP WEEKLY: SHORT
INTEREST, WFE/CAPEX AND LOWER ACLS
TAX RATE
Summary: (1) Short interest levels are at or near 4-year lows for many of the stocks in our
coverage universe, (2) Many SPE managements are arguing that wafer fab equipment as a
percentage of capex is meaningfully higher this cycle than last but the numbers argue
otherwise, (3) We do not believe that investors should be playing the stocks for a late
cycle trading rally unless/until the "Rule of Two" framework is satisfied, (4) Elpida
announced its intention to build a second 300mm facility that it plans to equip gradually
over a few years depending upon end market conditions, (5) Raising our FY2005 EPS
estimate for ACLS to reflect a lower than expected 2005 tax rate; we continue to not
recommend overweight positions in the stock, (6) Brief review of strained silicon and SOI
technology, and (7) News, events and price performance.
SHORT INTEREST LEVELS AT OR NEAR 4-YEAR LOWS FOR MANY OF THE
STOCKS IN OUR COVERAGE UNIVERSE. We continue to believe that investors
should not be taking overweight positions in the Semi Equipment stocks (we provide
more detail below from our latest pure cyclical report that we published last week on
what we believe would need to occur for there to be a late cycle trading rally in the
stocks) particularly in light of surprisingly bullish current Street sentiment on the group.
While we recognize that short interest is only one measure of Street sentiment, we believe
that the May short interest data (which tracks short interest levels from April 15th to May
15th) underscores this bullish sentiment as short interest in many of the large cap stocks
in our Neutral rated coverage universe is at or near 4- year lows. For example, short
interest in Applied Materials was at 27.3 million shares in May (2% of total shares
outstanding). Short interest has not been that low in the stock since July of 2000. Similar
to Applied, short interest in KLA-Tencor was at 9.7 million shares in May (6% of total
shares outstanding) and short interest has not been that low in the stock since February of
2001. Finally, short interest in Teradyne was at 5.2 million shares in May (5% of shares
outstanding) and short interest in the stock has not been that low since August of 2001.
With short interest at such surprisingly low levels across the group coupled with the
continued high number of calls we receive from clients who are bullish on the stocks, we
believe clients should be cautious about playing the group for an H2'04 trade.
MANY ARE ARGUING THAT WAFER FAB EQUIPMENT AS A PERCENTAGE OF
CAPEX IS MEANINGFULLY HIGHER THIS CYCLE THAN LAST BUT THE
NUMBERS ARGUE OTHERWISE. Several industry executives and experts have
argued recently that while capital spending is lower in 2004 than it was during the 2000
cycle, wafer fab equipment (WFE) as a percentage of capex has increased meaningfully
over time. The argument follows that even though industry-wide capital spending today is
not as high as it was in 2000, the increased spending on WFE is making up some of the
difference in lower capex for the equipment companies. In the table below, we use the
worldwide semiconductor equipment shipment data reported by SEMI as a proxy for
annual WFE spending. We then divide the SEMI shipment data by annual capex data
provided by IC Insights (which we check against our bottom-up annual capex estimates).
The table below highlights a few trends. First, WFE as a percentage of capex is only
marginally higher in 2004 as compared to 2000, as WFE as a percentage of capex is at
approximately 80.4% in 2004 (derived by annualizing SEMI shipments from the first four months
of the year) versus 78.3% in 2000. Second, even with the slight increase in WFE as a percentage of
capex, the CAGR of SEMI shipments from the peak in 1997 to 2004 is still only 4%, in- line with
our thesis that the Semi Equipment industry is a pure cyclical as it is now growing at a CAGR of
less than 5%. Note in the table below that WFE/capex ratios tend to rise during an upturn and
decline during a downturn as fab shells that are started at the end of one upturn are completed
during a downturn and then equipped during the next upturn. Thus shell activity is high during a
downturn (which depresses WFE/capex) and WFE activity is higher during an upturn (which
increases WFE/capex).
US$ billions; %
Capex SEMI shipments (WFE) WFE as a % of capex
1990 $12.0 $8.5 70.5%
1991 $12.6 $8.9 70.7%
1992 $11.4 $8.1 70.8%
1993 $15.5 $10.4 66.8%
1994 $22.5 $14.5 64.5%
1995 $39.6 $24.0 60.7%
1996 $42.6 $26.3 61.8%
1997 $38.0 $27.6 72.6%
1998 $28.5 $21.9 76.8%
1999 $32.6 $25.5 78.2%
2000 $60.8 $47.6 78.3%
2001 $38.1 $28.1 73.7%
2002 $27.0 $19.8 73.2%
2003 $29.8 $22.2 74.5%
2004E $46.2 $37.1 80.4%
Average 71.6%
Source: Capex figures from IC Insights, WFE from SEMI (2004 estimate
derived by multiplying the first four months of the year by three), Goldman
Sachs Research.
WE DO NOT BELIEVE THAT INVESTORS SHOULD BE PLAYING THE STOCKS FOR A
LATE CYCLE TRADING RALLY UNLESS/UNTIL THE "RULE OF TWO" FRAMEWORK IS
SATISFIED. As we mentioned above, last week we published our third report in a series in which
we analyze the Semi Equipment industry as a pure cyclical. In our latest report, we introduced the
"Rule of Two" framework which sets the parameters under which we believe it would be likely for
the stocks to enjoy a late cycle trading rally. The two rules in the framework include: (1) is there a
meaningful reacceleration in fundamentals? And (2) are the stocks trading far enough below fair
value to compensate investors for the risk of owning the stocks late in the cycle? In the Semi
Equipment industry, we believe that Rule One (fundamental reacceleration) is most likely to be
satisfied by a meaningful up-tick in fourth quarter orders, which we currently anticipate will
decline sequentially following slight order growth in the third quarter (+5% sequentially). We
believe that in order for the parameter set forth in Rule Two to be satisfied (valuation), the stocks
would need to trade at least 20% below our normalized free-cash flow based fair value estimates.
The stocks in our coverage universe are currently trading essentially in-line with our fair value
estimates so we would need to see a 15% to 20% pullback in the group for Rule Two to be
satisfied. Consistent with our practice in our first two cyclical reports of using the Chemical
industry for historical lessons of how pure cyclical stocks trade, we examined Dow Chemical in
order to garner a better understanding of a potential trading rally late in the fundamental cycle.
Dow's historical trading pattern highlights that fundamental reacceleration alone is NOT enough to
drive a second wave of stock appreciation. The valuation parameter must also be satisfied in order
for investors to enjoy a meaningful stock return and be compensated for taking the risk of owning
stocks during the later stages of the cycle. Therefore, unless or until both rules set forth in our
framework are satisfied simultaneously, we continue to believe that investors should not be
overweight the stocks.
ELPIDA ANNOUNCED ITS INTENTION TO BUILD A SECOND 300MM FACILITY THAT
IT INTENDS TO EQUIP GRADUALLY OVER A FEW YEARS DEPENDING UPON END
MARKET CONDITIONS. Elpida Memory (a joint venture DRAM maker formed between NEC
2 Goldman Sachs Global Investment Research
June 20, 2004 Analyst Comment
and Hitachi) announced on June 10th that it has begun construction of a second 300mm DRAM
fab that is slated to begin production in the second-half of 2005. After a meeting with Elpida, we
understand that the company intends to equip the fab gradually over the course of a few years
depending upon end-market demand. The shell of the facility is intended to allow for a maximum
capacity of 60k wafers per month. While management indicated that it has not yet finalized its
plans for funding the facility or ramping capacity, it expects the entire project to cost between $4.1
billion and $4.5 billion. The estimated price tag on Elpida's 300mm facility generated some
questions from investors given that, in general, a 300mm fab costs about $3.0 billion. We would
note, however, that the facility is being built to eventually provide a significant amount of capacity,
about 2x the capacity that most 300mm fabs are being built to provide. Said another way, the fab is
likely expected to be more expensive than most other 300mm fabs because it is intended to provide
more capacity than most other 300mm fabs. The initial equipment ramp for the facility will be on
110-nanometers but the company intends to introduce 85-nanometer capacity at the facility toward
the end of 2005. At its first 300mm fab, the company is adding an additional 7k wafers per month
in 100-nanometer capacity in order to bring total capacity at the facility to 28k wafers per month by
the end of 2004. We believe that Elpida is likely to begin to place orders for the fab for its first
round of capacity expansion in H2'04 but we would not expect the facility to be fully equipped for
several years as we believe that the next downturn is likely to surface sooner rather than later to
prevent the company from needing/being able to afford the additional capacity.
RAISING OUR FY2005 EPS ESTIMATE FOR ACLS TO REFLECT A LOWER THAN
EXPECTED TAX RATE; WE CONTINUE TO NOT RECOMMEND OVERWEIGHT
POSITIONS IN THE STOCK. We are raising our FY2005 EPS estimate for Axcelis to $1.30 from
$1.00 to reflect a lower than expected tax rate in 2005 (we had been modeling a 28% tax rate in
2005 but we understand that the company will continue to recognize a lower tax rate of about 6.5%
through 2005 due to tax benefits related to operating loss carry-forwards). Axcelis has been the
best performing stock in our coverage universe YTD, as we believe that value investors have
accumulated positions in the stock. While we understand that value investors are interested in the
stock given that it is trading at about 8x our FY2005 EPS estimate, we continue to highlight that
we believe that the Semi Equipment stocks should not be valued based on peak earnings (which is
what we believe our FY2005 EPS estimate to be). Rather, we believe that the stocks should be
valued on normalized free cash flow or even normalized earnings. Over the course of the last full
cycle (including the upturn and the downturn), ACLS generated no free cash flow per share and
about $0.30 per share in normalized earnings (even applying a multiple of 35x to the normalized
earnings figure would only imply an intrinsic value of about $10). We are therefore very hesitant to
chase the stock based on a peak earnings valuation. Further, we continue to believe that leading
fundamental indicators for ACLS as well as the rest of the semi equipment group will begin to
flatten/turn negative in late 2004 or early 2005, which will likely cap any potential stock upside.
ACLS remains rated IL/N.
BRIEF REVIEW OF STRAINED SILICON AND SOI TECHNOLOGY. Strained silicon and
silicon on insulator (SOI) are terms that are being used increasingly by semi equipment
manufacturers during presentations. Below we provide a quick and informal definition of those
technologies so that investors can be more familiar with the terminology as they begin to be
mentioned more during conference calls and company presentations. Strained silicon allows semi
manufacturers to streamline the lattice structure of a chip's underlying substrate (i.e. the silicon),
thus allowing electrons to flow through the transistor more quickly which allows chips to have
higher processing speeds. Similar to strained silicon, SOI also allows chips to process information
faster and it also allows chips to require significantly less power consumption (hence it is
particularly important in consumer devices). SOI techniques involve placing a transistor's silicon
junction on top of an electrical insulator, which significantly reduces junction capacitance. The
junction capacitance in a typical transistor both slows down and heats up a chip because the
capacitance must be charged and discharged. Some estimate that SOI based chips allow for about
30% faster processing speed and 80% less power consumption than non-SOI based chips.
Last week
Monday 14 June (1) August Technology received multiple orders from a Chinese foundry. The
orders include wafer inspection equipment, defect analysis software, and FOUP inspection
equipment and are scheduled for third quarter installation. (2) LTX Corporation announced that
Zeevo selected the LTX Fusion CX to test its system-on-chip Bluetooth devices. (3) Applied
Materials acquired all of the outstanding stock of Torrex for an undisclosed cash amount. The
acquisition is intended to enable Applied to provide Atomic Layer Deposition (ALD) and Low
Pressure Chemical Vapor Deposition (LPCVD) applications.
(4) KLA-Tencor introduced the Surfscan SP2 for surface inspection at 65-nanometer and below
technology nodes.
Tuesday 15 June (1) ADE Corporation received a multiple system order for its 300mm Film
Inspection Tool from a Korean DRAM manufacturer. (2) Applied Materials shipped its 100th
Applied Centura Ultima HDP-CVD system for 300mm wafers. (3) Teradyne's Connection Systems
Division announced the availability of its Design Guidelines for High Performance Circuits. The
new HPC guidelines are intended to provide design criteria that will promote reliability while
helping to lower costs and cycle times for printed circuit boards fabricated at Teradyne. (4)
Ultratech introduced its Unity Platform), which will serve as a universal foundation for Ultratech's
future-generation tools. (5) Ultratech introduced the LSA100 laser spike anneal system, the
company's first tool built on its new Unity Platform, which is intended to be used for both
development and volume production of 65nm and smaller devices.
Wednesday 16 June (1) Veeco Instruments appointed Jeannine Sargent as Senior Vice President of
Business Development. Sargent has held positions at Voyan Technology, Gasonics, and Tencor
Instruments. (2) Tegal Corporation closed the acquisition of First Derivative Systems (FDS), a
developer of physical vapor deposition (PVD) systems for 300mm applications. Tegal purchased
substantially all of the assets of FDSI for about 1.4 million shares of common stock and
approximately $0.2 in assumed liabilities.
Thursday 17 June (1) Semiconductor Equipment and Materials International (SEMI) released the
May US semi equipment manufacturers' book-to-bill of 1.11; GS estimate 1.14. Please see our 6/17
note for additional details. (2) Entegris (ENTG-$10.71; IL/N) reported $0.13; GS $0.09; Street
$0.10. Please see our 6/17 note for additional details. (3) Asyst Technologies announced that
Toshiba Corporation selected Asyst's Performance Automation Architecture for its new 300mm fab
in Oita, Japan. Asyst's Performance Automation Architecture combines AMHS, atmospheric
loadports, RFID tracking and Automation Optimization software and services. (4) William Zadel,
Chairman and CEO of Mykrolis Corporation, announced his intention to step down as CEO in the
coming months as part of a planned retirement. Mykrolis' Board of Directors has initiated a search
of internal and external candidates for Zadel's replacement and expects to announce a successor by
year end 2004 or early 2005.
This week's calendar:
Tuesday 22 June: (1) FSI International (FSII-$7.26; NC) earnings release. Street $0.00.
Thursday 24 June: (1) FSA distinguished speaker series meeting in Boston, MA featuring Mark
Jagiela, President of Semi Test at Teradyne.
GS Universe Price Performance 6/18/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 14 -7% -7% -31% -46% -9%
AMAT Applied Materials IL/N 18 -4% -9% -15% -19% 13%
ATMI ATMI Inc. IL/N 24 -6% -6% -8% 4% -5%
4 Goldman Sachs Global Investment Research
June 20, 2004 Analyst Comment
ACLS Axcelis Technologies IL/N 11 -6% -8% -1% 7% 66%
BRKS Brooks Automation IL/N 17 -7% -16% -17% -27% 51%
CMOS Credence Systems U/N 13 -4% -10% 6% -4% 39%
ENTG Entegris IL/N 11 -6% -6% -16% -17% -20%
FORM FormFactor OP/N 21 5% 10% -1% 4% 15%
KLAC KLA-Tencor OP/N 45 -3% -7% -11% -23% -7%
LRCX Lam Research IL/N 23 -4% -7% -7% -27% 24%
MKSI MKS Instruments IL/N 21 -4% -11% -13% -28% 14%
NVLS Novellus Systems IL/N 29 -6% -12% -8% -31% -22%
TER Teradyne Inc. U/N 20 -6% -11% -16% -22% 5%
Mean -- -- -5% -8% -11% -18% 12%
Median -- -- -6% -8% -11% -22% 13%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in this r |
