GS US SEMI EQUIP WEEKLY: THOUGHTS ON THE STOCKS AND ANOTHER BUSY EARNINGS WEEK
Summary: (1) Stocks aren't cheap if cycle is really over so that's the only issue that matters
over the coming months, (2) Robotic Vision Systems negative preannouncement due to
delays in customer sign-offs; we continue to monitor such negative preannouncements as
we believe they are typically signs of the industry approaching the later stages of the
upturn, (3) Agilent semi test analyst meeting last week focused on new functionalities for
the company's 93000 SOC test platform and the company's new flash memory tester, (4)
June book-to-bill (Mon. after the close) expected to remain flat at 1.11 on 1% m-m order
growth and 1% m-m shipment growth, (5) FORM, MKSI, TER, ATMI, AEIS, and LRCX
all reporting earnings this week, and (6) News, Events and Price Performance. Our
coverage view remains Neutral.
STOCKS AREN'T CHEAP IF CYCLE IS REALLY OVER SO THAT'S THE ONLY
ISSUE THAT MATTERS OVER THE COMING MONTHS. Ahead of another busy
week in semi equipment, with the majority of semi equipment companies reporting
earnings, it is likely that many investors are questioning whether or not it makes sense to
step into the stocks given the recent harsh sell-off in the group with the average stock in
our universe down 22% month-to-date and down 13% last week alone. While stocks most
certainly look cheap on 2004 and 2005 P/Es, as we have said all along, multiples on
above normalized or peak earnings isn't the right way to value cyclical stocks. On
normalized cash flow, some stocks are slightly undervalued (KLAC, NVLS and AMAT)
while several are still overvalued (LRCX and TER). Given that some stocks are between
10-20% undervalued after last week, if we were convinced that the cycle still had several
more quarters of growth, we would be inclined to be more aggressive on the stocks.
However, one must have both attractive fundamentals AND attractive valuations in order
to buy stocks (even for a trade) late in a fundamental cycle. This is the so-called "Rule of
Two" that we highlighted in our most recent cyclical report.
That said, none of these issues matter much at all if the cycle is really over and investors
are going to begin to look to trough valuation metrics to value the stocks. We do believe
that the cycle is entering its final stages with inventory levels already creating a problem
for the chip companies, even before the significant amount of capacity that is set to come
online in H2'04 starts producing an even greater number of chips. As we highlighted last
week, most semi equipment managements remain extremely bullish but they are focusing
only on the demand side of the supply/demand equation and many don't seem to be
focusing at all on how much capacity is being added to the chip industry. If the forward
looking indicators (i.e. inventory levels and capacity utilization rates) continue to
deteriorate over the coming months, stocks are likely to trend down toward trough
valuation.
The debate that will likely ensure is what is the appropriate valuation metric for the next
trough? This debate is sure to rage heated and heavy over the next 6-9 months. On one
hand, the next fundamental downturn isn't likely to be as severe as the 2001/2002
downturn so that would argue for a higher trough price/tangible book value multiple.
However, the other side of the argument is that the industry should be "re-rated" given (if
this really is the end of the cycle), that peak-to-peak growth rates are much less robust than they
used to be and, in turn, semi equipment stocks didn't offer any more trough to peak appreciation
potential than most other cyclical businesses. If this is the case, then stocks are likely to trend back
toward their 1996 trough multiples when the average stock in our universe traded at a trough value
of 1.8x book value. If this were to happen, the average stock in our universe still would have
significant downside.
ROBOTIC VISION SYSTEMS NEGATIVE PREANNOUNCEMENT DUE TO DELAYS IN
CUSTOMER SIGN-OFFS; WE CONTINUE TO MONITOR SUCH NEGATIVE
PREANNOUNCEMENTS AS WE BELIEVE THEY ARE TYPICALLY SIGNS OF THE
INDUSTRY APPROACHING THE LATER STAGES OF THE UPTURN. Last week Robotic
Vision Systems negatively preannounced its June-quarter revenues partly due to delays in
customers signing off on tools already shipped under SAB-101 (recall that under SAB- 101 a
customer must "accept" a tool before an equipment company can recognize it as revenue). In our
weekly out last week we highlighted a similar negative preannouncement from Semitool, which
was also driven by delays in customer sign-offs on tools that had already been shipped. We had
highlighted that the negative preannouncement from Semitool could be company-specific (in
relation to new products) but the emergence of a second such negative preannouncement is
noteworthy as it could potentially have more significant ramifications given that in previous cycles
customers not accepting tools as quickly as originally expected has typically been a sign of the
industry approaching the later stages of the upturn. We continue to monitor this issue closely as we
believe that continued negative preannouncements due to delays in customer sign-offs on tools is
an indicator of the cycle approaching its final stages.
AGILENT SEMI TEST ANALYST MEETING LAST WEEK FOCUSED ON NEW
FUNCTIONALITIES FOR THE COMPANY'S 93000 SOC TEST PLATFORM AND THE
COMPANY'S NEW FLASH MEMORY TESTER. We attended the Agilent (A is covered by
Deane Dray) semi test analyst meeting last Friday in conjunction with the back-end portion of the
SEMICON West industry trade show. The company did not provide any updates to its guidance or
discuss near-term business trends during its analyst meeting but rather provided a brief product
overview and demonstrations of new functionalities for its 93000 SOC test platform (including its
new BIST Assist 6.4 module for high speed buses and its Audio/Video 8 module for analog device
test) and its new flash memory tester, the V5400. We believe that the key takeaways from the semi
test analyst meeting are: (1) Management highlighted its belief that there needs to be not just a
consolidation in test companies but a consolidation in tester platforms in order to lessen the intense
competitive environment in the back-end, and (2) The flash memory test segment is garnering a
great deal of focus as flash memory bit growth (which drives the need for test capacity) is
significantly outgrowing the market in 2004. While this may be a bit of a backward-looking focus
on the part of the test companies (note Samsung's recent more cautious commentary on the flash
memory market), back- end managements are nonetheless extremely excited about the flash
market. As we noted above, Agilent provided a demonstration of its new V5400 memory tester
which is targeted at flash memory testing (both NOR and NAND) but can also address DRAM,
SRAM, and stacked memory testing. We believe that Agilent has been late to market with the
V5400 tester thus allowing Credence to gain some share with its Kalos flash memory test platform
in early 2004 and it will therefore be interesting to see if the Agilent platform gains traction in the
coming months. Further, we will be monitoring the flash memory segment due to what may
become an overcapacity situation that could lead to a slowdown in the flash memory test segment.
JUNE BOOK-TO-BILL EXPECTED TO REMAIN FLAT AT 1.11 ON 1% M-M ORDER
GROWTH AND 1% M-M SHIPMENT GROWTH. Semiconductor Equipment and Materials
International (SEMI) is reporting the June US semi equipment manufacturers' book-to-bill ratio on
Monday night around 6pm eastern. We are estimating a flat book-to-bill ratio in June, on 1% m-m
growth in orders and 1% m-m growth in shipments. We are modeling three-month rolling average
overall orders of $1,585 million (+1% month-over-month) and overall shipments of $1,430 million
(+1% month-over-month). We estimate front-end shipments of $1,120 million (flat
month-over-month) and front-end orders of $1,220 million (flat month-over-month), yielding an
estimated front-end book-to- bill ratio of 1.09. We estimate back-end shipments of $310 million
(+1% month-over-month) and back-end orders of $365 million (+1% month-over- month),
yielding a back-end book-to-bill ratio of 1.18. We continue to emphasize that the book-to-bill is an
unaudited and backward looking metric and should therefore not be a significant trading event for
the stocks.
EXPECT FORM TO REPORT A SOLID QUARTER WITH SLIGHT UPSIDE POTENTIAL TO
OUR ESTIMATES. FormFactor is reporting June-quarter earnings on Tuesday after the market
close. We model 2Q2004 revenues of $41 million (up 11% sequentially) with earnings per share of
$0.14, versus the Stree
t consensus earnings per share estimate of $0.15. We also estimate 1Q orders of $50 million, flat
sequentially. We expect FormFactor to report another solid quarter with some upside possible to
our estimates. We believe that strength in the company's business during the quarter was driven by
the 512MB density transition, the 0.11 micron linewidth shrink, and the 300mm technology
transition in the DRAM market. While many investors continue to highlight concerns around the
timing of the DDRII transition, we would note that management has suggested for several quarters
that the DDRII transition would not become a significant business driver for the company until late
2004/early 2005. Further, recall that customers need to order DDRII capable probe cards ahead of
the actual transition. We would therefore not expect the DDRII transition to have prevented the
company from hitting its estimates as some investors have suggested during the quarter.
EXPECT MKS TO REMAIN BULLISH IN TONE BUT TO LIKELY GUIDE FOR SLOWER
REVENUE GROWTH IN THE THIRD QUARTER. MKS Instruments is reporting June-quarter
earnings on Tuesday after the market close. We model revenues of $150 million (up 13%
sequentially) and earnings per share of $0.40, versus the Street consensus earnings per share
estimate of $0.39. Our checks nearing the end of the quarter with subcomponent suppliers
indicated that the business outlook remains relatively unchanged from the beginning of the quarter.
We would expect MKS to maintain a bullish tone regarding the overall cycle given the high level
of current business activity, however, recall that management has previously commented that
growth in Q3 could less robust than previous quarters and the company reiterated those thoughts
during their analyst meeting at SEMICOM West last week. We do believe that shipment growth for
MKS' OEM customers (i.e. AMAT et all) will start to moderate over the coming quarters and we
believe MKS is taking that fact into consideration with their slightly less aggressive tone regarding
CQ3. Another topic that we will be listening for on the call is how much MKS emphasizes its
non-semiconductor businesses, which we expect will be important in mitigating the cyclicality of
the semiconductor business during the next downturn.
EXPECT TERADYNE TO REPORT 5% SEQUENTIAL ORDER GROWTH IN JUNE; WATCH
MAY/JUNE CUSTOMER UTILIZATION RATES. Teradyne is reporting June-quarter earnings
on Tuesday evening, with its earnings call being held Wednesday morning. We forecast 2Q
revenues of $515 million (up 20% sequentially) with earnings per share of $0.37, in-line with the
Street consensus earnings per share estimate. While Teradyne does not officially provide order
guidance, we model June-quarter gross orders of $580 million (up 5% sequentially), consistent
with recently heightened Street expectations. While we believe business activity remains high, we
also note that our checks suggest that capacity utilization of Teradyne's testers at its customer sites
declined in May. While we have not sees the June data, another month-over-month decline in June
would not portend well for the out-quarter order outlook. Further, our checks with some of the
packaging and test house customers at the end of the quarter indicated that a significant amount of
tester capacity will come online in H2'04 from orders made in early 2004. One of the packaging
and test house customers even commented that it expects tester pricing to decline in H2'04 due to
the incremental capacity coming online. We believe that recent weakness at Amkor underscores the
risk to declining orders to the packaging and test houses in H2'04. That said, we believe that
outlook at the IDM customers is stronger with utilization rates higher and a significant drop-off in
H2'04 orders less likely. We believe the key for Teradyne's stock in H2'04 will be whether or not
Goldman Sachs Global Investment Research 3
Analyst Comment July 18, 2004
the strength from IDMs can offset what looks to be potential weakness at the packaging and test
houses given the significant incremental capacity being brought on at those customers.
ATMI REPORTING WEDNESDAY, EXPECT A SOLID Q2 BUT THE OUTLOOK FOR
WAFER- STARTS IN THE SECOND-HALF MAY BE LESS ROBUST. ATMI is reporting
earnings on Wednesday morning. We model June-quarter revenues of $60 million (+7%
sequentially) with earnings per share of $0.17, in-line with the Street consensus estimate. Recall
that ATMI is divesting its Technology business, which accounts for about 30% of sales and is
driven by capital expenditures. During the quarter ATMI announced that it has divested three of its
Technology segment businesses. The company has indicated that by the end of 2004 it will have
divested all six of its Technology segment businesses and it has now divested four in total, so the
company appears to be ahead of its divestiture plan. We believe that ATMI's business tracked
according to plan during the quarter, but our checks suggest that there may be some incremental
concern around an inventory-driven correction in Taiwan during H2'04 and in the US, Intel's
comments about reducing its wafer- starts likely has negative implications for ATMI in the
second-half. Street numbers on ATMI for CQ3 don't seem overly aggressive but Intel's recent
comments most likely take away any upside potential to those estimates and we believe there may
be some risk to H2'04 estimates. ATMI is extremely well-positioned to outperform the industry
over the course of a full cycle given its leverage to wafer starts which, in our opinion, are growing
at 2- 3x the rate of long-term semi capital expenditures. That said, ATMI is not immune to the type
of inventory correction that typically marks the early stages of an industry downturn.
EXPECT THE STREET TO FOCUS ON AE'S Q3 OUTLOOK COMPARED TO ITS PEERS AS
CONCERNS AROUND SHARE LOSS PERSIST. Advanced Energy is reporting June- quarter
earnings on Wednesday after the market close. We forecast revenues of $110 million (+5%
sequentially) with earnings per share of $0.24, versus the Street consensus earnings per share
estimate of $0.25. Our checks nearing the end of the quarter with subcomponent suppliers
indicated that the business outlook remains relatively unchanged from the beginning of the quarter.
We think one of the keys to AE's call will be any progress management can cite around reducing
the cost structure of the business, particularly reducing the dual manufacturing costs associated
with having facilities in both the US and China. Another key area of focus will be the number of
products that customers have qualified to be manufactured in China because as that number
increases, the company will have more flexibility to decrease the cost structure in the US. We also
believe the Street will pay close attention to AE's forecasted Q3 growth relative to MKS'
forecasted Q3 growth, as Street concerns around share loss persist.
EXPECT LAM TO GUIDE FOR AT LEAST 5% SEQUENTIAL ORDER GROWTH IN Q3. Lam
Research will report June-quarter (fourth fiscal quarter 2004) earnings on Wednesday after the
market close. We model revenues of $300 million (up 30% sequentially) and earnings per share of
$0.25, versus the Street consensus earnings per share estimate of $0.26. We forecast June-quarter
orders of $400 million (up 14% sequentially), essentially in-line with management's guidance for
+10% to +15% sequential order growth. Lam management has highlighted throughout the quarter
that its orders will outgrow the industry in H2'04. If the Street is expecting at least 5% sequential
growth for the broader industry (although these expectations may be too high after last week's
news from NVLS and KLAC), by definition Lam's orders should grow about 10% sequentially in
Q3 to $440 million. We would expect management to maintain its typically bullish tone on the
earnings call. Several other topics that may arise on the call include, the timing for the transition to the company's new CFO, Martin Anstice, post the retirement of former CFO,
Mercedes Johnson. Another issue that the Street may question is the continued sale of significant
shares by the company's CEO, Jim Bagley with the main issue being when the overhang of insider
sales will be completed.
News, Events and Price Performance
Last week
Monday 12 July (1) Applied Materials appointed David Wang president of Applied Materials Asia,
effective immediately. Wang will be responsible for Applied Materials' business strategy, planning
and execution throughout Asia with particular focus on building infrastructure in China. Wang has
been with Applied Materials since 1980. (2) Applied Materials introduced the Applied Reflexion
LK Ecmp (electro-chemical mechanical planarization) tool for 300mm, copper/low-k
manufacturing at 65nm and smaller geometries. (3) Asyst Technologies introduced NexEDA, a
software equipment connectivity product intended to comply with the latest 300mm and EDA
requirements. (4) Rudolph Technologies introduced the WaferView 320 Turbo macrodefect
inspection tool. (5) Axcelis Technologies announced that Freescale selected its Global Support
Solutions to assist it in managing its ion implantation tools. (6) ATMI announced that its
environmental abatement equipment business, ATMI Treatment Systems, opened an office in
Songjiang, China. (7) Novellus Systems announced that Hynix Semiconductor will equip its new
300- mm T1 facility with a range of Novellus' process equipment, both for front- end-of-line and
back-end-of-line applications. (8) Novellus Systems introduced enhancements to its CVD Speed
platform, which were a result of a joint development effort between Novellus and a Korean DRAM
manufacturer. The enhancements are intended to address high-density plasma gap fill technology
for volume production at the 65-nm node. (9) ADE Corporation introduced NanoXam, a
noncontact inline 3-D metrology system for copper CMP processes. (10) Novellus Systems and
BOC Edwards have entered into a licensing agreement under which BOC Edwards will
manufacture 300mm Inova XT disposable shield sets and distribute them directly to end-user
customers worldwide. (11) Semitool announced the shipment of a multi-million dollar wafer
packaging tool to Siliconware Precision Industries. (12) Brooks Automation and Cimetrix entered
into a strategic alliance, under which Cimetrix will provide SECS/GEM/300mm communications
standards software and support for Brooks' OEM system automation products. (13) Semitool said
that it won a key ruling in a patent infringement lawsuit filed against Novellus Systems in June
2001. (14) Varian Semiconductor Equipment Associates shipped its 100th 300mm single wafer
VIISta ion implanter. (15) Cymer shipped its first ELS-7010 krypton fluoride (KrF) light source to
a lithography toolmaker in July 2004 and has received additional KrF orders from other customers,
to be delivered through the end of 2004 and into 2005. (16) Mattson Technology introduced
Helios, a dual-chamber 300 mm rapid thermal processing system for 65-nm and below devices.
(17) ATMI formed a partnership with SemEquip to exclusively market and sell their ClusterBoron
ion implant materials. ATMI and SemEquip will co-develop new delivery systems for
ClusterBoron materials targeted at 65-nm and below devices. The strategic partnership includes an
equity investment by ATMI in SemEquip's recently completed round of venture financing. (18)
Entegris introduced the Spectra line of 300mm wafer carriers that are intended to unify the
microenvironment protection of a Front Opening Unified Pod (FOUP) with the protection during
transport of a Front Opening Shipping Box (FOSB). (19) Robotic Vision Systems said that total
products shipped to customers for its third fiscal quarter ended June 30, 2004, together with a
limited number of finished systems held back for internal use, was approximately $18 million.
However, because of SAB 101-mandated revenue deferrals tied to customer acceptance, coupled
with engineering machines and non-revenue loaners of equipment shipped during the quarter
included in the $18 million, reported sales for the quarter will be approximately $14 million.
Tuesday 13 July (1) Mattson Technology announced that a foundry has selected its new Aspen III
ICPHT strip systems to manufacture 130 nm and 90 nm devices. (2) Robotic Vision Systems
announced that it received a $1.1 million order for its Data Matrix reading and machine vision
inspection equipment. (3) Brooks Automation announced that a Japanese semiconductor
manufacturer has purchased Brooks FACTORYworks for its new 300mm fab. (4) Teradyne
announced that Foveon selected its IP750 test system for CMOS Image Sensor device test.
Wednesday 14 July (1) FormFactor announced that it has developed the first 72-DUT (device
under test) NOR Flash memory wafer probe solution for the Credence Kalos 2 test system. (2)
Teradyne announced that Marvell has purchased multiple J750 test systems for wafer sort testing of
their broad spectrum of VLSI devices. (3) Mattson Technology received orders from Hynix
Semiconductor for the production of DRAM devices in its new T1 300mm fab. (4) Teradyne was
recognized as a "10 BEST Supplier" the VLSI Research 2004 customer satisfaction survey. (5) FEI
Company introduced its fifth- generation system, Vectra Gen5, for advanced front and back-side
circuit editing on 65-nm devices. (6) Robotic Vision Systems received two orders for its WS-series
bumped wafer inspection system from customers in Greater China. (7) Advantest Corporation
introduced the T2000 Microstar, an addition to its T2000 Series open-architecture test platform.
The T2000 MicroStar is a small-footprint mainframe intended for use by manufacturers of
microcontrollers and other very cost-sensitive devices. Advantest expects to begin shipping the
T2000MS in Q1 2005. (8) Rudolph Technologies announced that Tokyo Electron selected
Rudolph as a supplier for its next- generation integrated macrodefect inspection solutions. The
company's new i- MOD AFP will be fully integrated into the Tokyo Electron's TELFORMULA
thermal processing system without any impact to system footprint. (9) Entegris expanded its Stream
tape and reel product line to include 8 and 12 mm embossed carrier tape made with GE's LEXAN
polycarbonate resin.
Thursday 15 July (1) Teradyne Connection Systems' High Performance Circuits group was
presented with the 2004 Customer Value Enhancement Award for its accomplishments in the
Printed Circuit Board manufacturing and fabrication market by Frost & Sullivan. (2) Electroglas'
Sidewinder strip test handling system received the 2004 Advanced Packaging Award. (3) Robotic
Vision Systems introduced a new generation of its Visionscape software environment, used for
development and deployment of machine vision applications.
This week's calendar:
Monday 19 July: (1) Semi Equipment and Materials International (SEMI) US Equipment
manufacturers book-to-bill. GS estimate 1.11.
Tuesday 20 July: (1) FormFactor (FORM-$20; IL/N) reporting earnings. GS $0.14; Street $0.15.
(2) MKS Instruments (MKSI-$17; IL/N) reporting earnings. GS $0.40; Street $0.39. (3) Cymer
(CYMI-$29; NC) reporting earnings. Street $0.29. (4) Teradyne (TER-$18; U/N) reporting
earnings (conference call held the following morning). GS $0.37; Street $0.37.
Wednesday 21 July: (1) DuPont Photomasks (DPMI-$17; NC) reporting earnings. Street -$0.40.
(2) Kulicke & Soffa Industries (KLIC-$8; NC) reporting earnings. Street $0.33. (3) Mattson
Technologies (MTSN-$9; NC) reporting earnings. Street $0.12. (4) ATMI (ATMI-$22; IL/N)
reporting earnings. GS $0.17; Street $0.17. (5) Advanced Energy Industries (AEIS-$12; IL/N)
reporting earnings. GS $0.24; Street $0.25. (6) Lam Research (LRCX-$21; IL/N) reporting
earnings. GS $0.25; Street $0.26.
Thursday 22 July: (1) Ultratech (UTEK-$13; NC) reporting earnings. Street $0.02.
GS Universe Price Performance 7/16/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 12 -12% -22% -22% -53% -35%
AMAT Applied Materials IL/N 17 -11% -15% -15% -26% -13%
ATMI ATMI Inc. IL/N 22 -10% -19% -19% -5% -21%
ACLS Axcelis Technologies IL/N 9 -14% -24% -24% -8% 11%
BRKS Brooks Automation IL/N 16 -13% -22% -22% -34% -10%
CMOS Credence Systems U/N 10 -15% -27% -27% -23% 2%
ENTG Entegris IL/N 9 -10% -21% -21% -29% -37%
FORM FormFactor OP/N 20 -2% -11% -11% 1% 10%
KLAC KLA-Tencor OP/N 39 -15% -20% -20% -33% -24%
LRCX Lam Research IL/N 21 -17% -23% -23% -36% -5%
MKSI MKS Instruments IL/N 17 -15% -25% -25% -41% -25%
NVLS Novellus Systems IL/N 27 -12% -13% -13% -35% -29%
TER Teradyne Inc. U/N 18 -14% -22% -22% -30% 6%
Mean -- -- -12% -20% -20% -27% -13%
Median -- -- -13% -22% -22% -30% -13%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in this re |
