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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: ajtj99 who wrote (7767)	11/24/2001 7:21:37 PM
From: orkrious	Read Replies (2) \| Respond to of 99280

RE the Sox stocks, read what CSFB said about KLAC on 10/19. Subsequent to this, on Nov 14 (according to Briefing) they made cautious comments at a SoundView conference. They speak at CSFB's conference Tuesday. I look forward to their being cautious again. <G> KLAC is Hold rated. KLAC has a dominant position in the inspection and process diagnostic of two of the fastest growing sectors in the SCE. The company is clearly outperforming in an extremely difficult industry environment. Company is well positioned to benefit from all three transitions: 0.13 micron, low k/copper, and 300 mm. In addition, credit should be given to a management team that has managed well the volatility of the cycle; one of the few companies in our space who have not taken a one-time charge, and one of the few companies taking an extremely conservative view of SAB101 accounting. Unfortunately, we continue to believe that fundamentals are likely to worsen even here over the next several quarters. Here is what to worry about: (1) inspection tends to lag not lead the cycle, both up and down, (2) reticle inspection is 30% of F1Q orders, TeraStar is 50-60% of reticle inspection orders, both peaked this quarter. Replacing this business to get flat orders will be challenging in this environment. (3) 300 mm represented 60% of F1Q orders; this is not sustainable. (4) Street estimates still do not accurately reflect negative impact of SAB101; earnings power in F02 and F03 suspect. (5) KLAC has a premium valuation in the group; while best positioned to weather downturn, trough to peak revenue and earnings leverage not as compelling. We would advise investors to be patient and wait for the right price points. We would start to accumulate in mid $20s and get aggressive in high teens. F1Q at high end of guidance. SAB101 revenue and EPS was $503m and $0.44 versus our estimate of $470 mm and $0.42 and guidance of $470-$490m and $0.43-$0.46. Street consensus was $0.43. Shipments of $375m, in-line with us, low end of $375 to $400 mm range. Better revenue due to U.S. (40% of revenue, big chunk INTC) was offset by lower gross margins (company is using more conservative SAB101 accounting; cudos). Gross margins were 51.4%, 305bp below our estimate due to under absorption of manufacturing costs and an extended learning curve on ramping new products. Unlike some peers KLAC is not placing any period costs on its balance sheet. Hurts gross margins now but as a result deferred profit margin is 69% vs 30% for LRCX and NVLS. Operating expenses came in $4.2m lower than we had forecasted due to measured cost control efforts in R&D, actually $9.3m lower than our model. Stronger than expected operating leverage brought operating margins of 20.7% nearly inline with our model. Operating EPS of $0.44 came inline with guidance of $0.43-$0.46 and above our estimate of $0.42 - Street was at $0.43. While acknowledging the SAB 101 cushion, we think KLAC management deserves some credit for maintaining operating results (+50% GM, +20% OM) that some peers would covet even in peak times. Rundown of the balance sheet. KLA maintains one of the Industry’s strongest balance sheets. Cash position of $1.1 billion decreased 5% owing largely to share buybacks in accordance with an ongoing buyback program. Receivables declined 8% to $368 million and DSO’s rose to 67 days, up from 61 days in F4Q – payment revenue down more than receivables. Inventory of $361m was down 8% as a function of normal turns and rationalized production levels. Deferred profit – the gross margin off deferred product shipments – declined 17%, expected when shipments are below SAB 101 revenue. The cushion is running out. Good bookings in F1Q... outlook concerns us. Strong leverage to Cu and 300mm continued to provide for above Industry bookings in F1Q (B:B of approx 0.77 to 1). Our gross bookings estimate was $330m; company at $315m. Net bookings were $290m, down 5% sequentially vs guidance of flat to down 10%. * details the mix of orders in the quarter, roughly 95% of which were technology based (vs capacity). We expect however that exceptional strength in reticle inspection will be difficult to maintain and would not bet on new product introductions in F2Q(Dec) to be enough to support another leg down in capital spending. Backlog of $639m remains at approx six months of current shipments, and is still 76% above trough backlog in 1998. Risk of additional cancellations probably increases over the next two quarters despite mgmt’s efforts to “cleanse” its backlog. Our net bookings estimate in F2Q(Dec) is $275m, down 5% seq. Bookings momentum in reticle inspection could ease… newer products need to pickup the slack. Reticle inspection orders remained strong into F1Q, increasing to 30% of total orders up from 25% in the prior qtr. Most of this strength is owed to KLAC’s TeraStar reticle inspection system – accounting for 50-60% of reticle orders. Despite recent strength we expect TeraStar orders will begin tapering off in the Dec calendar qtr. Two key reasons why: 1. TSMC placed five TeraStars orders this quarter, saturating this customer in the near term. 2. Photomask is counter-cyclical to the semi cycle, typically lagging in upturns and downturns. As a result reticle inspection orders are ripe to decline in F2Q; management even echoed this belief on the call. We believe reticle inspection could decline from $100m to $60-70m in F2Q. Also important to note that 300 mm accounted for roughly 60% of total bookings for the period. This level is not sustainable in our opinion. Hard to imagine how bookings will remain flat in F2Q. KLAC is counting on some of its newer products and process solutions to pick up the slack. Microloop – a patented process designed to speed its customers’ time to market by a factor of five or more – is the most highly touted of these systems combining KLA’s leading edge eS20XP e-beam inspection and eV300 defect review tools, patented test structures, and defect/yield analysis software. KLAC claims the product set is already gaining widespread traction in betas, though we believe the real test will be how well it performs in the heart of this downturn. Lowering F02, instituting F03 estimates. For FY02 we are lowering our revenue and EPS estimate to $1,473m and $0.83 from $1,605m and $1.10. For FY03 we are initiating revenue and EPS of $1,405m and $0.80. Street consensus in F02 and F03 is $1.12 and $1.47. Street estimates still do not accurately reflect negative impact of SAB101. The cushion here is beginning to wane and expense structure for many of our companies remains too high. KLAC’s strong six-mth technology leaven backlog should help here – providing the company with better footing than most in our space. Though we are skeptical about a recovery for front end OEMs occurring before 4Q01, KLAC’s leverage to some of the Industry’s strongest technology transitions in 0.13 and Cu leads us to believe KLAC could outperform what we believe will be another industry decline in 02. We are modeling a bottoming in revenue in mid-2002 with a modest recovery off this bottom. We estimate current quarterly break-even at approx $250-$260m. Valuation - no need to be aggressive at these levels. We view KLAC as a premier name in the group with the best leverage toward technology transitions through both higher ASPs and solid market share. Still at current valuations we would remind investors to be price sensitive. In 1998 stock troughed at 1.0x book, 1.4x FTM sales, 1.0x TTM sales and 3.0x next cycles’ peak earnings – implying downside of greater than 60% from current levels. (KLAC was at 36 that day[orkrious]) Catalysts to own our names still not clear even when cyclical trends bottom. This is a franchise name but investors can afford to want for better points.

To: ajtj99 who wrote (7767)	11/24/2001 11:45:11 PM
From: Mike M	Read Replies (1) \| Respond to of 99280

aj, I'm a little more constructive on TXN than you are. AMAT's chart looks troubled but I've seen tougher resurrections. In any event INTC looks ready to bust out. Yeah it could be a little overbought but not so much that it won't go higher. In any event, it looks too good to me to be predicting its demise... I'm not sure what your point is regarding the intraday touching 1888, but I believe closing above that is particularly bullish. I won't argue that distribution is occurring, only that, before the next correction, we are likely to see higher prices. Equities have had plenty of opportunity to rollover and have yet to do so. Maybe they simply aren't ready quite yet. By the way the SPX seems to have closed within a point or so of the recovery high. I wouldn't be surprised if it paused here but sure looks to me like it will go higher soon. Just my opinion. We'll see...