Tom,
Here are a bunch of Merrill Lynch clips that might be of interest to group.
Long.....
Technology Bits and Bytes SM ? MORNING EDITION 12/15/99
SAP (SAP/SAPPF; $50 11/16/EUR568; C-1-1-7) Raising Price Objective, Reiterate Buy
We believe the software spending ?dry spell? will end with 1999. We believe SAP will be a major beneficiary of renewed spending in enterprise applications as well
as the new enterprise portal market.
Even though there still may be a short term risk in Q4, we believe there is still a lot of upside potential over the next 12 months.
Based on our DCF analysis and a 90x ?01E earnings of approximately EUR 9, we are raising the 12-month price objective to EUR800.
SAP ? 15 December 1999 What Has Changed?
Perception and investor sentiment has changed. We believe the one event that was needed to restore a certain amount of faith in the stock has occurred with the HP
deal, which amounted to $36 million. There have also been speculation of additional deals to be announced in the enterprise portal space, which has driven the stock price.
We believe SAP is a core stock in the B2B commerce market. The last decade has been about automating internal business processes and the next decade will be
about automating external business processes, which is a natural extension of SAP?s product set. HP Deal.
The HP deal illustrates the remaining license revenue potential of the installed base. HP is rolling out mysap.com to 50,000 users, which was feasible under R/3. The
signing of this contract validates the SAP strategy and mysap.com. HP works with several of SAP?s competitors but chose SAP. We believe this will be a sign of things to
come. Enterprise Portals. The company has also announced a portal for the German chemicals industry, which is its first portal announcement. We believe there will be
many more to follow. Although the business models have not been defined, this will be incremental revenue to the business model, and it will be high margin revenue as
well.
Outlook. We believe there is potential for revenue growth acceleration over the next 2-3 years, as well as an opportunity for higher profitability margins based on the
new portal business as well as the new ASP distribution channel.
VTSS - communication chip misunderstood?
Price: $46 «
12 Month Price Objective: $63
Est. 5 Year EPS Growth: 38.0%
We hosted an upbeat meeting with Vitesse?s CEO yesterday. We came away feeling that concerns regarding business trends at Lucent were overblown, and that
the company would likely beat our FY00 and FY01 estimates.
We are increasing our EPS estimate for FY00 from $0.66 to $0.68, our FY01 estimate from $1.01 to $1.07, and are raising our opinion from an Accumulate / Buy to
a Buy / Buy.
We are increasing our price objective to $63, based on 22 times CY00 sales.
Fundamental Highlights:
We expect Dec. quarter revenues from Lucent to increase by 12% sequentially to $16.4 million.
The company?s Colorado Springs fab is now operating at 60% of its installed capacity. We also believe that the company is seeing yields from the fab which are
higher than originally expected.
Based on improving yields, we are increasing our FY01 gross margin estimate from 65.0% to 67.0%. Our FY00 gross margin estimate has been raised from 64.7%
to 65.2%.
We anticipate an upbeat Dec 99 qtr earnings call.
Upbeat meeting with the CEO
We hosted an upbeat meeting with Vitesse?s CEO yesterday. We came away feeling that concerns regarding
business trends at Lucent were overblown, and that the company would likely beat our FY00-01 estimates.
We are increasing our EPS estimates for FY01 from $1.01 to $1.06, and are raising our opinion from an Accumulate /Buy to a Buy / Buy. We are also increasing our price
target from $58 to $63, based on 22 times CY00 sales.
Business trends at Lucent positive
We believe the stock has underperformed its peers recently due to a number of concerns with the company?s largest customer, Lucent. We review each in turn.
1. Transition to contract manufacturing. Lucent recently transitioned some of its manufacturing operations to contractors, which resulted in flat revenues from Lucent during
the past two quarters. We believe that this transition is complete, and expect revenue growth from Lucent to return to historical levels.
2. Lucent Microelectronics. There have been concerns in the investment community that Vitesse has been
losing a material portion of its business at Lucent to Lucent Microelectronics. Based on our conversation
with management, we do not believe there is a material change in the competitive environment at Lucent.
3. Inventory build. Some investors are concerned that Lucent is building inventory to protect against Y2K
supply-chain disruptions, which could result in an order shortfall during the March ?00 quarter as inventory returns to normal levels. Vitesse management indicated that
components shipments to Lucent are driven by the company?s MRP plan, which means that products shipped to Lucent are replacing products that have been used to
manufacture equipment. While it is not clear whether or not finished goods inventory is being built, shipping
products based off of the MRP build plan suggests that component inventory is not being built. A review of these issues suggests that concerns regarding business trends
at Lucent are overblown. In fact we expect Dec. quarter revenues from Lucent to increase by 12% sequentially to $16.4 million.
Increasing gross margin and EPS estimates
On the operational side of the business, the company?s Colorado Springs fab is now operating at 60% of its
installed capacity. We also believe that the company is seeing yields from the fab which are higher than originally
expected. Based on improving yields, we are increasing our FY01 gross margin estimate 200 basis points from 65.0% to 67.0%. Our FY00 gross margin estimate has
been raised as well, from 64.7% to 65.2%. The gross margin
improvements should flow to the bottom line, and we are increasing our FY01 EPS estimate from $1.01 to $1.07.
Our FY00 estimate has been raised from $0.66 to $0.68.
Buying opportunity - raising opinion
The fundamentals for Vitesse continue to look solid. For FY00, we are modeling revenue growth of 52% in the
transmission business, and 77% in the gigabit Ethernet and fibre channel business. We believe there is upside to our gigabit Ethernet and fibre channel numbers, given the
100% growth those businesses realized in FY99. We believe the December 1999 earnings call will also be upbeat. The company is having a stellar quarter for design
wins, and we expect the company to report growing production shipments into Lucent?s Wavestar platform. At
the same time the company is reaping the benefits of a strong new product cycle.
We note that the company?s stock has under-performed its peers in recent months, due in part to concerns with Lucent that we believe are overblown. We believe this has
created a buying opportunity, and are raising our opinion from an Accumulate / Buy to a Buy / Buy.
Semiconductor Global Primer ? 11 November 1999
Highlights:
Our Global Semiconductor Primer ?A Second Helping of Chips?? is published today.
If we are right about our assumption that the cycle has several years more to run, then these stocks have much further to go. We are raising our semiconductor
industry revenue growth assumption for 2000 to 21.5% from 18.6%. Our estimate for integrated circuits revenue growth is higher still, at 22.7%.
We are raising our share price objectives for nine of the companies under our coverage in the U.S., as well as two of the companies under our coverage in Europe.
The main points in our industry primer are as follows -
In the past stocks have peaked when the growth environment deteriorates, and not because of valuation.
Industry capex has been in decline for two years, and the OECD lead indicator is still accelerating.
With a long lead time between the now increasing capex and ramp up of additional capacity, these factors suggest that neither a supply- nor demand-side
led recession is likely in the industry in 2000.
This in turn suggests to us a benevolent double-digit revenue growth environment for the industry. With a cycle potentially lasting 3-4 years earnings and
stock price upside is considerable.
There is still upside potential? we are raising our prices objective and our industry growth estimates.
We continue to believe that we are at the beginning of a three to five year upturn in the semiconductor market. In
this environment, semiconductor share prices have much further to go. Our semiconductor industry revenue growth
assumption for 2000 has been raised from 18.6% to 21.5%, and we are additionally raising our price objective for
eleven of the names under our coverage DFZ - omitted because of staleness in targets.
After 12 months? outperformance, investors in the sector need to be convinced there is significant upside to share
prices in 2000. We spell out four reasons why we believe this scenario will unfold.
1. Semiconductor Shares Fall When Industry Growth Rates Fall
The sell on valuation argument is often heard after the first spate of share price outperformance (we first heard it in May this year). Semiconductor valuations can always be
made to look reasonable by rising EPS estimates, especially at the heady top of the cycle. We are a long way from those halcyon times in the current cycle. We show in
Figure 1 that stocks collapse when growth collapses, as a result of overcapacity and/or economic weakness. It is hard to put together a growth-collapse scenario for 2000.
New capacity today will take two years or so to come on stream, and so oversupply is not a problem. OECD economic lead indicators are positive, which gives the
demand pull stimulus.
Our strategy is to be ahead of the curve on news flow ? hence our regular weekly commentary Wacky Wafers
Weekly (European Editon), Chipshots (US Devices) and Out of the Fab (US Equipment).
2. This is a Long-Term Growth Sector
Long-term growth in the industry is driven by Moore?s Law, which stipulates that the industry is characterized by
its significant cost reductions every year as a result of changes in the manufacturing process. These cost
reductions create new end-product opportunities and increased demand. Opting for a Moore?s Law based
explanation means we can forego the almost impossible task of trying to forecast bottom up semiconductor demand
by estimating end-product demand and semiconductor content.
3. Back to 3-5 Year Cycles
Cycles will exist while growth remains high, but after two years of declining capital investment, and with a tail-wind
of a strong OECD lead economic indicator, we believe the current upturn will last significantly longer than the two
downturns of the last three years.
4. Abnormal Recent History
Followers of the cycle for the last three years could be forgiven for thinking that the industry is an economically
flawed cyclical sector. In fact the very strong upturn leading up to the 1995 semiconductor recession, which got
worse as a result of a declining economic environment, led to the worst three years in the industry?s history. We
believe the double dip downturn was caused by far too much capacity investment over 1995-96. Paradoxically, for
the next downturn to be as severe as the last, we would first be expecting to see share prices at double or triple
their current levels.
Standing Still: Not An Option
Changing products, prices and technologies create an industry where standing still is not an option. In some
senses, the industry seems to be fragmenting, in that new sub-industries are emerging in areas that were once purely the concern of integrated device manufacturers
(IDM). Examples include the equipment industry and the design software industry which span off in the 1980s, the foundry and fabless businesses in the early 1990s, and
now the intellectual property (IP) sector which outsources the design of sections of a chip?s surface. But we also are seeing evidence of consolidation. The CEO of
STMicroelectronics, Pasquale Pistorio, is now legendary (at least in our circles) for his industry prediction back in the late 1980s. He forecast that the semiconductor
industry would mature into a handful of IDMs, with at least a 5% market share each, alongside hundreds of probably fabless niche players with well below a 1% market
share each. These niche players would arrive on the back of new technology, and, once this technology became mainstream and the IDMs jumped in, they would then
either be bought out by the IDMs, or move into fresh niches.
From older report
Semiconductors - Communications IC Companies At A Discount (Mark Lipacis 212-449-9063/Joe Osha 212-449-0930)
ú The communications IC sector has been weak over past several weeks, with some of the companies in our universe of coverage losing up to 30% of their market
capitalization. We believe the pullback in the sector is overdone, which has created a unique opportunity.
ú We are positive on the whole sector, due to the secular trends that are driving the industry. However, the P/E analysis suggests that Galileo (GALT; $21 3/8;
C-2-2-9; /qp/), TranSwitch (TXCC; $41 11/16; C-2-2-9; /q/), PMC Sierra (PMCS; $85; C-1-1-9; /q/) and Conexant (CNXT; $82 5/16; C-2-1-9; /q/) have the best
intermediate-term opportunity for recovery. These companies have been hit particularly hard over the last few weeks, and reported strong fundamentals and excellent
visibility into Q4.
ú We believe the sector has been weak due to investor concerns regarding supply disruptions due to the Taiwan earthquake, inventory buildup due to Y2K concerns,
and a drop off in Lucent?s business. Recent industry checks suggest that these concerns are overblown.
ú We continue to believe that the communications IC industry offers one of the most exciting investment opportunities for investors. Growth is being driven by a
number of secular trends including the Internet, converging voice and data networks, and the increasing use of standard silicon by communications equipment
vendors.
ú A review of P/E ratios for the sector shows multiples increasing over the past year. However it also shows P/Es stabilizing over the past four months. We use
average P/E multiples over the last four months as a baseline for our analysis.
Semiconductors ? 27 October 1999
Pullback is an opportunity
The communications IC sector has been weak over the past two weeks, with some of the companies in our universe of coverage losing up to 30% of their market
capitalization. We believe the weakness in the sector is overdone, which has created a unique opportunity for investors. Growth still driven by secular trends We continue
to believe that the communications IC industry offers one of the most exciting investment opportunities for investors. The growth drivers, which we review in detail in our
October 8 th in-depth report, include the Internet, converging voice and data networks, and the increasing use of standard silicon by communications equipment vendors.
We view the companies in this sector as a play on the buildout of the Internet and telecommunications infrastructure.
Valuations are high, but we believe warranted EPS multiples for the group have doubled over the past year and are high by most measure. We also note that the average
P/E for the sector has stabilized in the 70-80 range over the past four months. We believe the high valuations are warranted for the following reasons:
1. High growth rates. We are forecasting five-year CAGRs of 20-30% for many of the segments in this industry. One-to-two year growth rates, of course, are much higher
and up to 40-80% for some segments.
2. Good visibility. The secular trends that are driving the industry lend increased confidence to the projected
growth rates and EPS estimates for the sector.
3. P/E to growth rate ratio appears reasonable. The P/E to long-term growth rate ratios for companies in this
universe are between one and two. This is consistent with other technology companies in high growth segments.
As with many high P/E multiple technology stocks, the stock prices in this group are volatile. Determining the
correct valuation metric can be challenging, especially with companies that do not have the liquidity of some of
their larger customers. On average, we believe the communications IC sector should trade at a premium to the equipment industry. These companies are pure play
suppliers to communications companies, and have gross margins that are often higher than most of their customers. Since equipment vendors are forecasted to use
increasing amounts of standard silicon in their equipment, the growth rates for the communications IC companies will likely be faster than the equipment industry.
Therefore, we believe that on average, valuation multiples for this sector should be higher than the average for their customers.
Is the weakness warranted?
We believe investors have recently been concerned with several issues, which have been brought to the surface by a few inauspicious events. We discuss each briefly:
ú Supply tightening due to Taiwan earthquake. Component supply has been tight, and the recent earthquake has not helped the situation. The communications IC
companies have indicated they are getting supply, however we believe that the risk is that component shortages could result in manufacturing shortfall at OEMs. A recent
survey of OEMs by Merrill?s electronics manufacturing services (EMS) analysts suggests that if a manufacturing shortfall was to occur, it would likely be modest in
magnitude.
ú Inventory buildup due to Y2K concerns. There is some concern that equipment vendors are building inventory to protect against potential Y2K related supply chain
disruptions. We note that the companies in this sector have not seen Y2K inventory buildups at equipment vendors. While it is difficult to track customer inventory, most of
the communications IC companies have formed tight relationships with their customers to forecast production accurately, and we believe they would be aware of any
material inventory buildups.
ú Drop off in Lucent?s business. Lucent is a major customer of many of the communications IC companies in our universe. One of the company?s small suppliers
pre-announced a negative quarter, due in part to canceled orders from Lucent. This led to investor concern that there was a broad-based change in business trends at
Lucent. We note that Lucent reported a solid quarter last month, with revenues from optical networking and wide area data
networking increasing YoY by 60% and 46%, respectively. Merrill?s telecom equipment research team is expecting accelerating revenue growth through FY00 for LU, and
is not changing their EPS estimates.
ú Stock price pressure due to year-end profit taking. We concede that high P/E stocks could become targets as investors lock in profits before the end of the year. This
review of investor concerns leads us to believe that the long-term fundamentals of the industry are still intact, and that the recent correction in the group is overdone. Even if
the Taiwan earthquake or Y2K systems mishaps cause some supply disruptions, we would view these as one-time events. We continue to believe that this sector offers
excellent potential for return over the long term, and view the recent correction as an opportunity for investors.
In the following two pages we look at P/E multiple valuations for this industry from two perspectives. First we look at P/E ratios over time to illustrate how valuations for
individual companies, as well as the group average have behaved over the last year. Then we look at how P/E ratios for the communications IC companies have behaved
relative to their customers. Finally, we note that the P/E ratios have stabilized over the past four months, and use
this as a baseline to identify the intermediate term opportunity in the sector.
P/E review ? comparison within the sector
In chart 1, we have plotted the average P/E of the sector over the last 12 months. In charts 2 and 3, we have plotted the P/E ratio over time for each of the eight companies
in our universe of coverage. We used two charts for the sake of readability, plotting only four companies on each chart. On each chart we also plotted the average P/E ratio
for the eight companies in the sector.
The charts illustrate several important points:
1. The P/E ratio for the group has doubled over the past 12 months. The group average has increased from 35-
40 to about 70-80. We believe that this expansion is justified based on the trends discussed on the previous
page.
2. During the past four months, the group average P/E ratio has stabilized in the 70-80 range. We note that the recent weakness in the sector is not reflected in the charts
because of averaging. Each data point on the chart reflects the average P/E for the previous four weeks. Also the last data point is October 15 th , which is only the first full
week of the sector weakness.
Table 1 illustrates the amount of pullback each stock has seen relative to its P/E over the last four months. For
example, reading across for Galileo, ticker GALT, $0.76 is our estimate for next twelve month EPS; $21 is the most
recent price; which is used to calculate the current P/E ratio of 28; 41 is the average P/E for Galileo over the last
four months; and 31% is the discount of the current P/E (28) to the P/E over the last four months (41).
Semiconductor equipment stocks.
Technology Bits and Bytes SM ? MORNING EDITION 12/17/99
Novellus Systems (NVLS, $76 5/8, B-1-1-9) Raising Estimates and Price Objective
Penetration at accounts where Novellus was historically weak, such as Taiwan Semiconductor Mfg and Intel, are producing market share gains. The upsides are not in
copper products as much as they are in traditional product lines such as HDP-CVD, Tungsten and PECVD. Japan is also showing surprising strength which is a new
wrinkle to our outlook for CY-2000. Japan is now focused on advanced logic applications and device makers are showing a level of conviction in the future that we have not
seen in the last 9 years.
We are raising our earnings estimates for Novellus. We are increasing our FY99 estimates from $573 million in revenue and an eps of $1.72 to $576 million in revenue
and an eps of $1.75. We are also increasing our revenue and eps estimates for FY00 from $845 million and $3.35 to $990 million and $4.00.
We are setting a $120 price objective assuming a 30 multiple on CY?00 EPS of $4.00. NVLS is the most inexpensive stock in the group.
Technology Bits and Bytes SM ? MORNING EDITION 12/15/99
Asyst Technologies (ASYT; $48 1/2; C-1-1-9) Received An Order For 300m, Reiterate Buy
ASYT issued a press release stating that it received an order from a major company for 300mm, which happens to be Intel.
Intel is the leader in 300mm development. We think it is very positive that ASYT won this business. While we think there will be additional entrants into the 300mm
arena we believe ASYT will be well positioned.
We reiterate our Buy rating.
From another report:
Semiconductor Capital Equipment ? 13 December 1999
Companies With Largest Asian Exposure Begin to Outpace the Pack
ASYT and CMOS projected to have the largest exposure to Asia in 2000. (Chart 2 illustrates 60% of each
company?s revenues expected to originate from this region.) Positive incremental news expected to continue over the next 6 to 9 months as foundries place a string of
large orders for both of these companies.
CMOS Blows Away Booking Expectations:
CMOS reported 4Q?99 revenues of $80 million and operating EPS of $0.42 versus our estimates of $71 million and $0.30. Reported EPS was $0.35 including several
one-time charges. Quarterly bookings totaled $127 million a 72% sequential increase from $74 million last quarter and well ahead of our most recent estimate of $110
million.
We are making a significant change to our EPS projections and setting a $82 price objective assuming a 30 multiple
on FY?00 earnings of $2.71. We maintain our near term accumulate rating.
The three new platforms (Quartet, ValStar and Kalos) have all gained momentum and are making significant
contributions. The mixed signal tester, Quartet, is the hottest of the new products and now accounts for 69% of
sales. New orders continued to gain momentum during the quarter and currently exceed the company?s manufacturing capacity. Fortunately, the company brought its new
manufacturing facility (Hillsboro, OR) online during the quarter. CMOS should have $600 million/year capacity by mid 2000. Dominate market position at Asian test houses
(estimated to be 60% of 2000 sales) is a distinct advantage as the chip industry increasingly relies on Asian foundry.
Who Is Leveraged In Asia?
Most Exposure - ASYT CMOS NVLS KLAC AMAT CYMI LRCX TER BRKS VECO PRIA SVGI - Least Exposure
Estimated 2000 Business From Asia (ex Japan)
ASYT Wins Big Order
ASYT announced this week that one of the top semiconductor equipment manufacturers (we believe to be
KLAC) has placed a multi-system order for its new Asyst PLUS Portal, a fully integrated SMIF front-end.
ASYT has been working with a KLAC for some time on an automated wafer handling front-end. We believe this
announcement marks the beginning of an industry shift towards outsourcing fully integrated front-ends versus the
OEM's previous approach of buying the components on a piecemeal basis and performing the integration in-house.
The acceptance of ASYT's fully integrated SMIF front-ends will not only expand the company's current business
and increase 200mm revenues but will also make ASYT a more complete supplier to the OEMs. The strategy puts
the company in a better position to compete for the 300 mm business as it emerges over the next few years.
ASYT continues to be one of our favorite names and we believe the company's expanding OEM business combined
with its large exposure to the exploding SE Asian market will enable it to outperform the sector throughout 2000.
Semiconductor Capital Equipment ? 6 December 1999 Asyst Adds Customer in Japan
Asyst just won a contract at a second major customer in Japan. Sony was the first company to adopt Asyst?s
automation solution last summer. The second Japanese customer is likely one of the top 3 Japanese device makers.
We think investors have yet to recognize the shift in thinking on clean room technology that is overtaking the
semiconductor industry. A second major Japanese company adopting the technology is another testimonial to
changes gripping the industry and benefiting Asyst. What was a niche technology in the last cycle is going main
stream today. Over the next six months we think the ?Street? will recognize the company?s position and reward
it with a higher multiple. The combination of an expanding multiple and accelerating earnings could make
this stock one of the best performers in the sector. |
