Here is the CS First Boston report on LAM:
Acoording to this report, LAM is still undervalued.
With their upper estimated EPS of $2.30 for fiscal year 2000 and PE of say, 25, LAM could achieve near $70 by early next year !!
BUY
MIDCAP
Lam Research Corporation (LRCX)
Order Surge Accelerates Lam's Profit Rebound
Summary
Orders Surged In Q3 - Bookings of $220+MM exceeded our $175MM
forecast, paced by solid gains in all geographic regions.
Momentum unlikely to abate over next two quarters, barring a
collapse in DRAM prices.
Rebuilt Backlog Will Allow Top Line To Build - Nearly 25%
sequential revenue growth forecast for Q4 reflects rebuilt
backlog, up over 70% since Q1.
Profit Likely In Q4 - Lam's first profitable quarter will be
Q4 (June) as opposed to Q1:00.
Zero Tax Rate Next Year Boosts Net - Half of our $0.75 EPS
increase for F00 reflects a zero tax rate. Estimate has a
lot of upside.
Price Target Mkt.Value 52-Week
04/22/991 (12mo.) Div. Yield (MM) Price Range
34.13 $50 $0 None $1,320.8 $8-40
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
6/00E $1.65 0.90 20.7X 75% -- --
6/99E (1.60) (1.90) NA NA -- --
6/98A 0.00 NA NA -- --
Sept. Dec. March June FY End
2000E $0.25 $0.36 $0.47 $0.57 June 30
1999E (0.70)A (0.64)A (0.37)A 0.11
1998E 0.09 0.09 (0.13) (0.05)
ROIC --
Total Debt (3/99) NMF
Book Value/Share (3/99) $10.23
WACC --
Debt/Total Capital (3/99) NMF
Common Shares 38.7 mil.
EP Trend2 --
Est. 5-Yr. EPS Growth 18-23%
Est. 5-Yr. Div. Growth NA
1On 4/22/99 DJIA closed at 10,727.2 and S&P 500 at 1358.82.
2Economic profit trend. NMF = Not
Meaningful NA = Not applicable
LRCX is a leading manufacturer of etching systems and an
emerging supplier of chemical mechanical polishers to the
semiconductor industry.
Investment Summary
The combined plusses of a lowered cost structure, improved
manufacturing process and strong industry tailwind are behind
Lam's rapid return to profitability. Both F00 and F01's EPS
increases (from $0.90 to $1.65, and $2.90, respectively) are
tax- as well as revenue-driven, while this year's improvement
(from ($1.90) to $(1.60)) reflects higher shipments. Margin
upside is significant, as $100MM in incremental sales can
yield $0.50-$0.70 in incremental EPS. A 110% relative P/E on
tax-adjusted CY00 EPS of $1.90 yields a target price of $50.
No Share Loss In Lam's Etch Business
Reversing a period of eroding market share, Q3's estimated $220-225MM
in bookings (up 42% sequentially) evidenced share
stabilization as well as penetration gains. The latter were
evident in Japan (11% of orders), not a traditionally strong
geographic region for Lam. Round up the usual suspects of
large orders - Korea, the two major European companies, a
handful in the U.S., etc., as well as a rebound in Taiwan.
Q4's order prognosis is encouraging - up sequentially as the
combined plusses of a strong U.S. and Taiwan offsets a
downtick in Korea. Importantly, those foundries in Taiwan
most sensitive to DRAM pricing make up only a small fraction of
Q4's planned bookings.
Backlog Up, Shipments To Follow
We calculate that Lam's backlog grew by $79MM in Q3, and
stood at 16 weeks' sales at Q3's run-rate. This is enabling
Lam to ramp shipments one quarter ahead of plan. Rather than
target $160-165MM in billings, revenues are forecast to lift
by 24% sequentially to $190MM, paced by strong cluster etch
deliveries. With bookings growth projected to slow in Q1:00,
sequential revenue growth is apt to follow suit in H1:00. A
re-acceleration is possible in H2 and beyond if currently
vacant fabs are equipped late this year and next.
Margin Pressures May Ease Beyond Q4
The combination of high priced inventory (work in progress)
and residual price concessions necessitated by a very
competitive environment will curb gross margins again in Q4.
Some improvement is probable from improved overhead absorption
, though achieving 41-43% gross margins is unlikely before Q1:
F00. Discretionary spending restraints hold the most upside
to operating margins. Management's planned 8% growth in
combined SG&A and R&D in CY00 may be aggressive, though we do
look for the expense ratio to fall from 45% of Q3:99's sales
to 34-35% by Q4:00, yielding 10% or more operating margins by
then. With each point of operating margin worth $0.05 per
share per quarter, the leverage at Lam is material.
No Taxes Until F01
With over $100MM in tax loss carry-forwards, Lam will pay no
taxes through Q4:F00. F01's rate may be in the 15-20% range,
followed by a 32-34% rate in F02. We had assumed a 25% rate
in F00 and 30% the year after. These benefits are worth an
extra $0.40 per share next year, and $0.50 per share in F01.
Even Taxed, Undervalued
If taxed, CY00 EPS estimate would fall from $2.30 to $1.90.
Using the lower figure but applying a 110% relative P/E still
yields a $50 target price. Since the $1.90/$2.30 projection
is probably low, the target has upside.
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.
Lam Research (LRCX)
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
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