Report on LRCX recent earning by Prudential.
Pay close attention to their comment on the operational
leverage of LAM.
LRCX: REPORTS SIGNIFICANT UPSIDE TO STREET - WATCH AS THE LEVERAGE
MATERIALIZES - RAISING ESTIMATES, RAISING PRICE TARGET.
R E S E A R C H N O T E S July 30, 1999
Subject: Lam Research (LRCX-$46 3/8)--OTC
SEMICO
OPINION
Current: ACCUMULATE
Analysts: John W. Pitzer (650) 320-1633 Prior:
Maria M. Chiu (650) 320-1641 Risk: HIGH
12-Month Target Price: TO $55 FROM $45
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Ind. Div.: -- Yield: -- Shares: 38.9 mil. 52-Wk.Range: 52-8
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Current 6/98A $0.00A NM $0.09A $0.09A ($0.13)A ($0.05)A
Actual 6/99E ($2.89)A NM ($0.70)A ($2.16)A ($0.38)A $0.28A
Prior ($3.03)E NM $0.10E
Current 6/00E $2.50E 18.6X $0.50E $0.58E $0.66E $0.76E
Prior 6/00E $1.75E 26.5X $0.24E $0.36E $0.50E $0.64E
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INVESTMENT HIGHLIGHTS:
*Significant Upside to 4QFY99. Lam reported results for 4QFY99 well above
ours and street expectation. Revenue and fully taxed EPS of $210 million
and $0.19 were significantly ahead of our estimates of $190 million and
$0.07. As-reported EPS was $0.28 versus our estimate of $0.10. Street
consensus was $0.10.
*Upside driven by strong demand and pull-ins. Upside to revenue was driven
by the need for capacity, especially in Asia (foundries) and North America.
In addition, we believe that Lam is beginning to turn the tides on the
market share front - at least holding their own, if not gaining on the
margin. While share gains are occurring, we continue to believe that the
pricing environment in etch remains extremely competitive - we expect to
see more margin leverage in operating expenses than COGS.
*Strong quarter results matched by strong bookings. Book to bill for the
quarter was above 1.2 to 1, and we believe that new bookings were
approximately $255-$265 million, much better than our $230 million estimate
and up over 20% sequentially. Backlog at the end of 4QFY99 was
approximately 4 months or $280 million. Bookings should improve modestly
over at least the next two quarters.
*Watch the leverage in the model!!!. As expected (though the magnitude
under-estimated), Lam turned profitable in 4QFY99. There is significant
leverage to the model as revenue growth accelerates. We are raising our
fully taxed EPS estimates significantly for FY00 to $1.75 from $1.20. For
FY01 (June), we are initiating a fully taxed estimate of $2.40. Our new
calendar 2000 estimate is $2.15 (fully taxed), up from our old estimate of
$1.85 (fully taxed). On an as-reported basis we are increasing our FY00 EPS
estimate to $2.50 from $1.75.
Raising price target - reiterating accumulate. We are raising our price
target to $55 from $45. Our new 12-month price target represents a 28
multiple to our calendar 2000 EPS of $2.15. As the investment community
becomes more comfortable with Lam's market share position, we believe
investors will be willing to pay for the significant leverage in the
Company's P&L. Should visibility remain strong, we believe that there is
upside potential to our current estimates.
Figure 1: Lam Research--4QFY99 Financial Results
(Dollars in million, except per share)
4QFY99A 4QFY99E 3QFY99A 4QFY98A
Revenue $210.9 $190.0 $153.0 $230.4
Gross Margin 38.8% 38.5% 35.5% 40.1%
Op Margin 5.2% 2.2% -9.6% -1.8%
Net Income $11.3 $4.3 ($14.7) ($1.9)
EPS* $0.19 $0.10 ($0.38) ($0.05)
Source: Company reports and Prudential Securities estimates.
*Fully taxed estimate at 32%.
DISCUSSION:
Lam reported a strong 4QFY99. Lam reported results for 4QFY99 well above
ours and street expectation. Revenue and fully taxed EPS of $210 million
and $0.19 were significantly ahead of our estimates of $190 million and
$0.10. As-reported EPS was $0.28 versus our estimate of $0.10. Upside to
estimates was driven by better revenue and better gross and operating
margins--38.8% and 5.2% versus our estimates of 38.5% and 2.2%. Revenue
increased 38% sequentially and on a geographic basis, broke down as
follows: North America-38% versus 40% in 3QFY99; Europe-16% versus 26% in
3QFY99; Asia Pacific-39% versus 23% in 3QFY99; Japan 11% versus 7% in
3QFY99.
Strength of bookings outpacing industry recovery. Lam posted a book-to-bill
ratio in excess of 1.2 to 1, placing new orders at approximately $255-$265
million in 4QFY99, up 20+% sequentially from $215-$220 million in 3QFY99.
Strength of bookings is coming from Taiwan, Korea, and the United States.
It is important to note that current bookings represent only the company's
etch business and post-CMP cleaning business. The Teres CMP polisher
continues to be in beta site--the number of sites is growing. We would
expect the Teres to begin to contribute to the bookings (and revenue) line
in the September quarter.
Upside to our estimates was also driven by good expense control. Management
at Lam continues to execute. Earnings surprise in 4QFY99 was driven equally
by higher revenue and better expense controls. Although there continued to
be pricing pressure in the etch market during the June quarter, good
inventory and procurement management allowed for gross margins to expand to
38.8% from 35.5% in 3QFY99 and from 33.2% in 2QFY99.
In addition, total operating expenses in the quarter were $70.7 million,
down almost 12 percentage points from the $68.9 million posted in 3QFY99.
We believe that the Company should be able to hold growth of operating
expenses well below revenue growth over the next two quarters--in an
environment of good sequential revenue growth, we would expect margin
leverage.
Revising our estimates up to reflect better revenue and expense control.
We are raising our estimates for Lam to reflect: (1) a faster revenue ramp;
(2) better-than-expected gross margins; and, (3) continued good expense
control. For FY00, we are raising our revenue from $897.0 million to $1,035
million and as-reported EPS estimates from $1.75 to $2.50 and fully taxed
EPS to $1.75 from $1.20. Figure 2 shows our estimate revisions for LRCX.
For FY01, we are initiating estimates of $1,217 million in revenue, and EPS
of $2.40 - this is fully taxed. Our new calendar 2000 EPS estimate is
$2.15, up from our old estimate of $1.85.
Figure 2: Estimate Revisions
(Dollars in millions, except per-share data)
1999A 1999E Old 2000E New 2000E Old 2001E
Revenue $647.9 $627.0 $1035.0 $897.0 $1217.5
Gross Margin 36.0% 35.8% 40.8% 39.9% 41.8%
Op'g Margin -8.5% -9.8% 9.8% 8.4% 11.6%
Net Income ($112.9) ($120.0) $103.2 $76.1 $99.3
EPS ($2.89) ($3.03) $2.50 $1.75 $2.40
Fully Txd EPS $1.75 $1.20 $2.40
Source: Company reports and Prudential Securities estimates.
Pricing pressure in the etch market is still a concern, but less so. We are
still cautious about the pricing environment, but believe that price
declines lessened again in 4QFY99 - a basis for stabilization is the
strength of current orders and the desire by customers to expedite
shipments (i.e. lead-times are being to stretch out). In addition, we are
impressed by the Company's new Excelon product offering for oxide etch.
Importantly, we believe that our gross margin assumptions for Lam fully
reflect the current pricing environment, and improvements in prices could
drive upside to our current EPS estimates in FY00. We will have a better
understanding of the pricing dynamics as we move into the late summer
months. However, investors should note that we believe the longer term
gross margin model for the Company is in the mid 40% level - not the high
40% level that the Company enjoyed in past cycles.
VALUATION AND CONCLUSION:
Valuation--Raising the price target to $55 from $45. Lam is a turnaround
story finally coming to fruition. As such, we believed prior to 4QFY99 that
Lam's P&L had the most leverage in our universe - a combination of internal
improvements in operating metrics as well as a cyclical turnaround in the
business. We continue to believe that Lam should sell at a discounted
multiple to the group. We believe this discounted multiple helps to
reflect the current pricing and profitability trends in etch. However,
despite the discount, the valuation still has room for significant
appreciation. LRCX is currently trading at 22 times our new calendar 2000
EPS estimate of $2.15 (old estimate was $1.85). We are raising our price
target to $55 from $45, which represents 25 times our calendar 2000 EPS
estimate. We believe that this estimate could prove conservative as we
move throughout the year.
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