SSB Report....the part mentioning Lam is here for ease of viewing:
We are raising our price target for Lam Research (LRCX, $63 3/8,
Outperform-2H) to $75 from $62 previously. Our new price target is
derived by averaging our fully taxed CY00 estimate of $2.37 with our
expectation for CY01 EPS of $2.90 and applying a 28x multiple to the
resulting blended 2000/2001 estimate of $2.68. Our previous price target
was $62, or 25x our fully taxed CY00 estimate of $2.46.
Raising Price Targets For Four Companies, Ratings Unchanged
Salomon Smith Barney
Friday, September 10, 1999
--SUMMARY:----Semiconductor Equipment
Raising price targets for AMAT, ETEC, KLAC, and LRCX due to improved
industry visibility for December and good order fill-ins for the March
quarter.
Believe that orders will trend steadily up in Dec. & Mar. quarters. While
this order increase is already built into the Street expectations, we
expect a multiple expansion as the market expands the discounting horizon
to 18-24 months due to optimism regarding the recovery in semiconductor
industry.
We are moving our trading range boundaries up as a result. Leaving 2H
ratings on AMAT, KLAC, LRCX, and NVLS unchanged.
--OPINION:------------------------------------------------------------------
Raising Price Targets for AMAT, ETEC, KLAC, and LRCX
Following two days of upbeat commentary from the semiconductor equipment
companies that presented at the SSB technology conference, we are raising
our price target for four companies: Applied Materials (2H), Etec Systems
(1H), KLA-Tencor (2H), and Lam Research (2H). However, we are leaving
our ratings unchanged for AMAT, KLAC, and LRCX at 2H, Outperform as our
ratings reflect our medium-to-long term stance. For example, we still do
not have clear visibility on how the traditional seasonality in the PC
sector during the first half of next year will affect orders for the
equipment companies during that time frame and hence, remain slightly
cautious. We still believe the next major driver to orders/sales will
not arrive until the 300mm generation (late 2001/2002). Our price target
change reflects our short-term stance (3-5 months) regarding the current
strength in semiconductor sales, the follow through strength in the
equipment sector, and as a result, the multiple expansion possibilities.
Near Term Visibility Has Improved
Commentary from nearly all equipment companies points to improved
visibility for December and good order fill-in for the March quarter.
While the September quarter is typically back-end loaded, companies such
as Novellus Systems talked about a good order intake during July and
August. However, we would like to mention that none of this improved
visibility points to spectacular upsides but merely modestly up orders on
a sequential basis. Most current Street revenue/earnings estimates for
Applied Materials and Lam Research call for a 3-5% sequential revenue
growth, while those for Novellus Systems and KLA-Tencor factor in high
single digit revenue growth.
The current order improvement is hence a necessary condition for Street
estimates to be met. The question then is what is the right multiple. We
have always been surprised by the quick discounting nature of equipment
stocks. For example, in the third week of February 1999, Applied reached
its peak multiple on calendar 2000 earnings, a full 6-9 months earlier
than in the 1995 and 1997 cycles. If the semiconductor news continues to
be strong without any pauses and with the improving equipment order
outlook (from the last 2 days SSB tech. conf.), we could quite well see
equipment stocks achieve peak multiples on calendar 2001 earnings by
Jan/Feb 2000 - which is only 4-5 months away.
Basing New Price Targets On Earnings Potential in 18-24 Months
While our previous price targets were primarily based on our CY2000
earnings/sales estimates, we are basing our new price targets on an
average of 2000/2001 earnings estimates. This typically leads to a 10-25%
upside from the current levels. Near term, we could see the stocks trade
up towards the high-end of the range due to the excellent semiconductor
outlook and firming of equipment orders for the December and March
quarters.
Leaving 2H (Outperform, High Risk) ratings on AMAT, KLAC, LRCX, and NVLS
Unchanged
Our 2H ratings on these four premier companies reflect our medium-to-long
term stance due to risk/reward issues. We are clearly cognizant of the
fact that quality companies will never be cheap; however, we note that
equipment stocks are cyclical growth stocks. There is a 10-25% reward due
to multiple expansion; however, the risk is also 20-30% in the event of
any airpockets in the current recovery. This risk/reward compels us to
leave our 2H ratings unchanged. We would need to see evidence of 1) new
fab construction, 2) appreciable copper production implementation, or 3)
improved visibility on 300mm order buys to turn more aggressive from the
current stock price levels.
We are raising our price target for Applied Materials (AMAT, $79,
Outperform-2H) to $85 from $76 previously. Our new price target is based
on our expectations for EPS to increase 25-30% from our current CY00
estimate of $2.67 to $3.30-$3.40 in CY01. By averaging the CY00 and CY01
estimates, we arrive at estimate slightly above $3.00 and applying a 28x
multiple results in the $85 price target. Our previous target of $76 was
arrived by using a 28.5x multiple (a 15% premium to the S&P500) on CY00
EPS of $2.67. Instead of our previous expectation for Applied to remain
in the trading range between the low $50s and low $70s, we now expect
Applied to trade between the mid $60s to the mid/high $80s.
We are raising our price target for KLA-Tencor (KLAC, $71 1/2,
Outperform-2H) to $80 from $71 previously. Our new price target is
arrived by averaging the earnings in FY01 of $2.37 and our expectation of
$2.96 in FY02 (up 25% from FY01) and applying a 30x multiple. We are
using a 30x multiple versus 28x for AMAT, LRCX, and NVLS because we
believe earnings are still slightly depressed and see additional room for
upside in gross margins. Our previous price target was $71, or 30x our
FY01 estimate of $2.37.
We are raising our price target for Lam Research (LRCX, $63 3/8,
Outperform-2H) to $75 from $62 previously. Our new price target is
derived by averaging our fully taxed CY00 estimate of $2.37 with our
expectation for CY01 EPS of $2.90 and applying a 28x multiple to the
resulting blended 2000/2001 estimate of $2.68. Our previous price target
was $62, or 25x our fully taxed CY00 estimate of $2.46.
We are raising our price target for Etec Systems (ETEC, $45 3/16, Buy-1H)
to $64 from $48 previously. We believe trends in the photomask industry
are clearly pointing in the right direction and look for increased quote
activity to lead to increased orders. We believe the turnaround is right
around the corner and believe a 4x multiple on our CY00 sales per share
estimate of $16 is now appropriate. We had been more cautious before and
used a 3x multiple (which resulted in a $48 price target) but believe the
improved visibility justifies a 4x multiple at the current juncture.
We are leaving our price target for Novellus Systems (NVLS, $66 ¾,
Outperform-2H) unchanged at $80. However, we are moving away from our
previous price target calculation based on sales per share to an EPS
metric as earnings will no longer be depressed going forward. Consistent
with AMAT and LRCX, we are averaging our CY00 earnings of $2.59 with our
expectation for CY01 EPS of $3.15 and applying a 28x multiple to the
resulting blended 2000/2001 estimate of $2.87 - which yields a price
target of $80. |
