Better start learning about my new company....
GS report from May: Brooks Automation, Inc. (BRKS)
Technology
BRKS (IL/C): Solid CQ1 but guidance
mid-point well below Street consensus
52-Week Range US$21-12
YTD Price Change -20.44%
Market Cap US$614.3mn
Current Yield —
Fiscal Year (ending in Sep)
2004 2005E 2006E
US$0.79 US$0.19 US$-0.25
Brooks Automation reported operating EPS of $0.12 (GS and Street $0.08). EPS upside
was driven by higher sales (8% above our estimate), which more than offset lower than
expected gross margins (33.7% vs. our 35.0% estimate). CQ2 operating EPS was guided
to $0.03 to $0.10 vs. the Street $0.11 estimate. We are raising our significantly below
consensus CY05 EPS estimate to $0.05 from -$0.20 (Street $0.54) primarily on better than
expected CQ1 sales and earnings, but we believe Street numbers are too high and should
come down post the report. We continue to recommend that investors avoid BRKS, as we
expect deteriorating semi OEM shipments in H2? 05 to negatively impact the company?s
business and the stock is expensive at 2.5x tangible book value vs. its 2002 trough of
about 1.0x tangible book value. No change to our IL/C rating.
Due to our expanded coverage, we will be modifying the format of our earnings notes. We
will now primarily be writing shorter quarterly earnings notes, which will be comprised of
three sections: (1) our investment conclusion, (2) a short section discussing if and how the
report differed from our expectations coming into the call, and (3) changes we are making
to our earnings model as a result of the report. As always, we welcome any comments or
feedback on our new format and how we may work to improve it in the future.
WE WOULD CONTINUE TO AVOID THE STOCK, AS WE EXPECT THAT BROOKS'
BUSINESS WILL BE NEGATIVELY IMPACTED IN H2'05 BY WEAKENING SEMI OEM
SHIPMENTS. We continue to recommend that investors avoid BRKS, as we believe that the
company's semi OEM business is likely to weaken in H2'05 driven by deteriorating semi OEM
shipments. Recall that approximately 50% of Brooks' business is driven by semi OEM shipments.
Industry-wide tool shipments have been at higher levels than industry-wide semi equipment orders
for the past few quarters, which we believe strongly implies that semi OEM shipments are likely to
decline in H2'05. We would highlight that 2005 semi capex budgets for most of the major capital
spenders (including Intel, Samsung, TSMC, AMD, Texas Instruments, STMicro, Powerchip, etc.)
are significantly front-half loaded, which also implies that tool shipments are likely to decline in
H2'05. Additionally, we believe that Street EPS estimates for Brooks are too high, as the Street is at
$0.54 in CY2005 vs. our new $0.05 estimate. With explicit out-quarter EPS guidance of $0.03 to
$0.10, below the Street $0.11 estimate, we believe consensus numbers should come down post the
report.
Regarding valuation, we prefer to use normalized earnings and normalized free cash flow to value
the semi equipment stocks as we believe normalized metrics best account for the inherent volatility
in the business. Given our expectation that BRKS will generate negative earnings and free cash flow
over the course of the current full cycle (2003-2006), we are left looking at trough price to tangible
book value to gauge downside risk in the name. Brooks has approximately $5.50 per share in
tangible book value and the stock troughed at about 1.0x tangible book value during the 2002
downturn, which would imply downside risk to approximately $5.50 vs. the closing price of $13.70
on Tuesday. While we don't believe that Brooks will trade down to $5.50 during this downturn
because we feel it is a relatively better company this cycle, we do believe that this valuation metric
suggests that the stock is far from a valuation support level. Therefore, as long as fundamentals
continue to disappoint the Street's very bullish expectations, we do not believe the stock will sustain
an upward trend.
CQ1 GROSS MARGINS BELOW EXPECTATIONS WITH EPS UPSIDE DRIVEN BY BETTER
THAN EXPECTED SALES. Brooks reported CQ1 operating EPS of $0.12 vs. the GS and Street
$0.08 estimate. EPS upside during the quarter was driven by higher than expected sales (which
came in at $129m, +10% sequentially, 8% above our estimate). Sales increased 12% sequentially in
CQ1 in the company's tool automation business. Higher than expected sales more than offset lower
than expected gross margins of 33.7% vs. our 35.0% estimate. Lower gross margins were driven
primarily by weaker margins in the factory hardware segment. Gross margins in the equipment
automation business were 29.1% in CQ1 vs. 30.2% in CQ4'04, gross margins in the factory
hardware business were 15.6% in CQ1 vs. 21.8% in CQ4'04, and gross margins in the software
business were 69.9% in CQ1 vs. 65.2% in CQ4'04. Management indicated that gross margins in
factory hardware were negatively impacted by the recognition of a $4 million sorter tool with 0%
gross margins, an increase in warranty and inventory reserves of $2 million, and the company
continues to see pricing pressure in this segment. New orders of $115 million were up 13%
sequentially and were 5% above our estimate of $110 million.
WE ARE RAISING OUR SIGNIFICANTLY BELOW CONSENSUS CY2005 EPS ESTIMATE
TO $0.05 FROM -$0.20 ON BETTER THAN EXPECTED CQ1 SALES AND EARNINGS, BUT
WE REMAIN FAR BELOW THE CONSENSUS AND BELIEVE IT NEEDS TO COME DOWN
SIGNIFICANTLY. We are raising: (1) our significantly below consensus CY2005 EPS estimate to
$0.05 from an LPS of -$0.20 and our FY2005 EPS estimate to $0.19 from $0.01 (vs. the Street
CY2005 EPS estimate of $0.54), (2) our significantly below consensus CY2006 LPS estimate to
-$0.15 from -$0.30 and our FY2006 LPS estimate to -$0.25 from -$0.44 (Street $0.87), and (3) our
CY2007 EPS estimate to $0.45 from $0.35 and our FY2007 EPS estimate to $0.28 from $0.18 (no
Street consensus available) on better than expected CQ1 sales and earnings.
I, Jim Covello, hereby certify |
