YAHOO STOCK OF THE DAY-----CYMER
Stock of the Day (Archive)
Apr 24, 1998
The reaction to the Asian crisis last Fall was swift and severe, especially for semiconductor and
chip equipment stocks, but the impact on these companies will linger on for many months to come.
Underscoring the point is Cymer (Nasdaq:CYMI - news) , a maker of laser systems used in chip
making, which just hit its earnings target for the first quarter but warned that depressed spending by
chip makers on capital equipment is likely to continue for the next few quarters. The quandary for
investors is whether to focus on the exciting long-term prospects for companies like Cymer and
hope the current malaise is already in the stock price, or to watch and wait while the Asian
slowdown drags on indefinitely.
To some degree, the question hinges on when deep ultraviolet lasers will push chip making to the
next level. Cymer had waited more than a decade for older chip photolithography technology to be
exhausted, and prior to the Asian crisis, the company was experiencing a rapid ramp-up of demand
for its excimer lasers. These complex optical systems mix rare gases with halogen to produce
pulses of short-wavelength light, and when they are built into chipmaking equipment they enable
semiconductor manufacturers to squeeze ever-tinier circuitry onto chips. Smaller, denser chips are
faster and more cost-effective, but chipmakers had to wait until there was sufficient market demand
to warrant the hefty investment in new equipment.
The time seemed to have arrived last year, but unfortunately for Cymer many Asian chip makers
put their capital investment plans on hold due to slumping memory chip prices and painful economic
conditions in the region. Industry watchers still expect an aggressive industrywide transition from
0.35 micron chips to 0.25 micron over the next several years (a micron is a millionth of a meter,
and these sizes refer to the line width or spacing between circuitry on a chip). This transition
requires an unprecedented investment in semiconductor manufacturing equipment, and Cymer's
excimer lasers are a critical component in the new deep ultraviolet (DUV) machines. The company
commands an estimated 80% of the market for excimer lasers.
Cymer figures their systems can be used to bring line widths as low as 0.10 micron. There are
potentially competing technologies being developed such as electronic beam and X-ray systems,
but these appear to be much more expensive than DUV. Extreme ultraviolet (EUV) is probably
more than a decade away from use in production.
The stock had soared more than ten-fold in its first year as a public company, reaching a high of
$49.25 last August, but then it plunged amidst the Asian situation and a heavy dose of short-selling
by speculators. It dropped as low as $14.50 in January, but has crept back up to $25.25 currently.
After the close on Thursday, Cymer reported earnings per share of 9 cents, matching the
consensus estimate from analysts for the first quarter. That was down from 14 cents a year-ago.
Revenues of just under $50 million in the quarter were up from $37 million a year ago but down
from $59 in the prior quarter. The company went on to say that second quarter revenues are
expected to be flat with the first quarter, and that earnings will likely be down sequentially due to
higher production costs associated with new models and lower margins.
That shouldn't come as much of a surprise, though, indeed prior to this statement analysts were
looking for earnings of just 8 cents per share in the second quarter. They might shave estimates a
bit more after today's news, but basically it was already assumed that 1998 would be a pretty
tough year for Cymer and other chip equipment companies. Analysts are looking for the company
to earn $0.40-$0.43 this year, less than half its '97 profit of $0.86 per share. But business is seen
turning up again in 1999 to produce earnings of $0.93, and the longer-term growth rate is
projected at 35%.
As the company indicated in its earnings release Thursday evening, the impact of the Asian
slowdown is likely to continue for several more quarters, so it's not as if Cymer is on the cusp of a
miraculous turnaround. Nonetheless, investors with a long-term view might see it as a company at
the center of the next generation in chip making. Eventually when capital investment by chip makers
picks up again, Cymer's lasers should be in great demand.
As with any company involved in the semiconductor equipment industry, volatility if not outright
boom-bust cycles are to be expected. Nonetheless, Cymer has an amazing lock on the market for
what looks like one of the most vital technologies for chip manufacturing in the coming years. |
