Novellus Seen Near Trough Valuation
Mary Crane, 04.21.06, 8:31 AM ET
Novellus Systems reported Wednesday first-quarter results that beat guidance and consensus estimates, with revenue of $365.9 million and earnings per share of 25 cents.
But Bear Stearns analyst Michael O’Brien says management’s June quarter guidance is too conservative, given the company’s aim to regain its reputation of meeting or exceeding expectations, and might disappoint investors. Revenue is projected to be in the $370 million to $380 million range at the semiconductor-equipment manufacturer.
“To us, this demonstrates that Novellus’ underperformance versus the other segments of the industry continues,” the analyst writes in a Thursday report.
First-quarter revenue was up 10% year-over-year, and bookings increased 18.7% sequentially to $417 million. Still, O’Brien says Novellus’ top-line growth will continue to grow slower than the overall industry.
The real opportunity at Novellus (nasdaq: NVLS - news - people ) is in the margins, O’Brien believes. First-quarter gross margins grew to 45.8% from the December 2005 level of 42.3%, driven by a well-executed profitability improvement plan. The company is aggressively building deferred revenue, primarily via shipments to Japan, which O’Brien believes could drive revenue growth well into 2007.
These plans, however, are still somewhat conservative in O’Brien’s view, and he says more could be done to make further improvements to expand the company’s margin leverage.
For now, Novellus stock is near trough valuations, the analyst estimates, and value investors should be attracted to it.
O’Brien maintains his $34 price target and “outperform” rating, citing his view that the stock has margin leverage and value buys will see past the poor near-term, top-line performance. |
