Here is the analyst report from Credit Suisse First Boston Corp.
Lam has a significant upside potential.
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Semiconductors/Capital Equipment
BUY
MID CAP
Lam Research Corporation (LRCX)
Upgrade to Buy As Orders Rebound
Summary
Upgrade to a Buy; Order Momentum Building-Q2's estimated book-
to-bill of 1.1:1 is apt to be surpassed in Q3, as technology
and select capacity investment by logic, DRAM, and Foundry
sources rises.
Q3's Revenue Plateau May Be Surpassed In Q4-Q2 billings of $
142MM were $20MM above plan. Modest gains in Q3 may be
followed by sharper Q4 ramp.
Lingering Margin Pressures Perpetuate Red Ink In H2-Despite
further downsizing, margin pressures will continue into Q4,
reflecting tough pricing. Higher volume in Q1:00 points to
resumption of profitability.
Huge EPS Leverage-$100MM of revenues and 35% variable pretax
margins suggest incremental EPS upwards of $0.50 per $100MM
in incremental sales.
Price Target Mkt.Value 52-Week
01/28/991 (12mo.) Div. Yield (Billions) Price Range
32.31 $50 $0 None $1.2 $33-8
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
6/00E $0.90 0.80 35.9X 133% - -
6/99E (1.90) (2.40) NA NA - -
6/98A 0.00 NA NA - -
Sept. Dec. March June FY End
2000E $0.07 $0.17 $0.26 $0.40 June 30
1999E (0.70)A (0.64)A (0.46) (0.10)
1998A 0.09 0.09 (0.13) (0.05)
ROIC -
Total Debt (12/98) Neg.
Book Value/Share (12/98) $10.75
WACC -
Debt/Total Capital (12/98) NM
Common Shares 38.4 mil
EP Trend2 -
Est. 5-Yr. EPS Growth 18-23%
Est. 5-Yr. Div. Growth -
1On 01/28/99 DJIA closed at 9281.3 and S&P 500 at 1265.4.
2Economic profit trend.
LRCX is a leading manufacturer of etching systems and an
emerging supplier of chemical mechanical polishers to the
semiconductor industry.
Investment Summary
We are upgrading LRCX from a Hold to Buy, and reducing our
F99 EPS loss estimate, from $2.40 to $1.90, while raising our
F00 (June) EPS projection by $0.10 to $0.90. Driving the
upgrade and improved EPS projections are solidly higher orders
, both booked in Q2 and prospectively in H2. This will drive
top-line growth at a more rapid clip. Offsetting tough
pricing is lower post-restructuring operating expenses.
Combined, this points to shrinking losses this fiscal year
and expanded profit potential in F00. A 130% relative P/E on
CY00 EPS of $1.60 yields our $50 target price.
Q2 Orders Up More than 15% Sequentially
We calculate LRCX's book-to-bill was close to 1.1:1. With few
cancellations, backlog may have grown by $10MM. Driving
orders is (1) resumption of sub-0.25 micron investment,
especially by DRAM manufacturers, (2) selective line
balancing awards to boost existing capacity, and (3)
reemergence of Taiwan foundry investment. As with other font-
end manufacturers, LRCX is benefiting from a modest rebound
in capital spending above the September lows. Market share in
most geographic regions has stabilized (Europe may be an
exception) while spares activity has risen. The latter is a
good indicator of higher chip industry capacity utilization
and prospectively higher future orders.
Q3 Bookings May Lift by More than 10% Sequentially
Reading between the lines, we suspect Q3's book-to-bill could
top 1.15:1. The drivers are the same as Q2, plus renewed 0.25
micron investment in Taiwan. Management noted that foundries
are capacity limited at 0.25 micron, a recent occurrence. We
attribute this to the increased availability of design
software in CYQ4:98 which led to a 50% increase in 0.25
micron mask demand at Dupont Photomask. Importantly, with
broadbased capacity buys yet to occur, order prospects in
both the June and September quarters appear healthy.
Expanding Lead Times, Customer Requirements, Argue For Q4
Shipment Ramp
Q2's billings, at $142MM, were $20MM above plan, as much of
the upside in orders translated into accelerated customer
shipments. Backlog remains below three months' sales, and
efforts to rebuild it are being partially stymied by customer
delivery pull forwards. For Q3, we look for only $5-6MM in
sequential revenue growth. With orders growth possibly 3X
that amount, LRCX's lead times are apt to move out, allowing
a more vigorous revenue ramp, beginning in Q4, and continuing
possibly through F00.
Margin Pressures may Ease In Q4
Despite aggressive cost cutting, margins remain under
pressure as (1) revenues are shy of the $160-170MM quarterly
breakeven run rate and 2) industry pricing, especially over
the past two quarters, was severe. While improving a bit in Q3
, price pressure will preclude LRCX achieving breakeven
results in Q4 even on $160MM or so in sales.
Leverage May Magnify EPS Post F99
Improved pricing in a less competitive environment associated
with an industry upturn, higher volume, slow growth in
discretionary spending all suggest variable operating
profitability of 35% or more. These factors suggest upside
potential to both our $0.90 F00 and $2.15 for EPS projections.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within
the last three years, served as a manager
or co-manager of a public offering of securities for or makes
a primary market in issues of any or all of the companies
mentioned.
Dupont Photomasks (DPMI, 48 3/8, Buy)
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
This memorandum is for informative purposes only. Under no circumstances
is it to be used or considered as an offer to sell, or a solicitation of
any offer to buy, any security. While the information contained herein has
been obtained from sources believed to be reliable, we do not represent
that it is accurate or complete and it should not be relied upon as such.
We may from time to time have long or short positions in any buy and sell
securities referred to herein. This firm may from time to time perform
investment banking or other services for, or solicit investment banking or
other business from, any company mentioned in this report.
Copyright 1999, CREDIT SUISSE FIRST BOSTON CORPORATION
= = Lam Research Corporation = = LRCX: BUY
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