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Technology Stocks : ESIO: Electro Scientific Inds. -- Ignore unavailable to you. Want to Upgrade?

To: mopgcw who wrote (36)	12/17/2002 9:46:43 PM
From: mopgcw	Respond to of 43

Electro Scientific Industries (ESIO) ESIO: Preview of 2Q03 (Nov) 3H (Underperform, High Risk) Mkt Cap: $609.1 mil. December 17, 2002 SUMMARY * We generally expect an in-line quarter from the SEMICONDUCTOR company. While checks indicate a surge in the carrier EQUIPMENT plate business, we note it is a small component of Glen Yeung their broader test and termination equipment business. * We do not expect any deterioration in ESI's DRAM repair business and believe activity from Samsung and Karen Wang Hynix could drive modest sequential growth. We expect flat--at-worst performance in laser trim. Helped by a late-quarter press release announcing sales of advanced microvia laser drills to Samsung, we also expect flat to modest improvement in advanced packaging. * We believe KLIC's September orders were satisfied by machine vision inventory-on-hand and are hopeful that ESI will benefit more directly from the recent set of ball-bonder orders received by KLIC. * We retain our Marketweight industry stance at this stage, as near-term demand conditions remain uncertain, in our view. FUNDAMENTALS P/E (5/03E) 244.3x P/E (5/04E) 39.3x TEV/EBITDA (5/03E) NA TEV/EBITDA (5/04E) NA Book Value/Share (5/03E) NA Price/Book Value NA Dividend/Yield (5/03E) NA/NA Revenue (5/03E) $171.0 mil. Proj. Long-Term EPS Growth 20% ROE (5/03E) NA Long-Term Debt to Capital(a) NA (a) Data as of most recent quarter SHARE DATA RECOMMENDATION Price (12/16/02) $21.99 Current Rating 3H 52-Week Range $38.25-$13.51 Prior Rating 3H Shares Outstanding(a) 27.7 mil. Current Target Price $28.00 Convertible No Previous Target Price $28.00 EARNINGS PER SHARE FY ends 1Q 2Q 3Q 4Q Full Year 5/02A Actual ($0.10)A ($0.01)A ($0.08)A ($0.03)A ($0.23)A 5/03E Current $0.01A $0.02E $0.03E $0.03E $0.09E Previous $0.01A $0.02E $0.03E $0.03E $0.09E 5/04E Current $0.05E $0.11E $0.17E $0.23E $0.56E Previous $0.05E $0.11E $0.17E $0.23E $0.56E 5/05E Current NA NA NA NA NA Previous NA NA NA NA NA First Call Consensus EPS: 5/03E $0.20; 5/04E $0.81; 5/05E NA Calendar Year EPS: 12/02E $1.32; 12/03E ($0.09); 12/04E $0.22; 12/05E NA OPINION Conference call on Wednesday, December 18th at 4:45pm EST; Dial-in 800-288- 8960; Replay 800-475-6701, Passcode 663655 Electro Scientific Industries Rating: 3H Report Date: 12/18/02 (M except EPS) 2Q03 (Nov) E Street 2Q02 (Nov) A 1Q03 (Aug) A Revenue $42.0 $42.70 $40.2 $43.0 Gross Margin 46.5% 50.4% $0.46 Net income $0.5 ($0.4) $0.2 Diluted Shares 28.0 27.2 27.9 EPS $0.02 $0.02 ($0.01) $0.01 VALUATION At $21.99 ESIO is trading at 1.70 book versus its historical range of 0.4-- 7.2x. Our target of $28 reflects a 2.2x multiple to book value of $13 per share. This multiple of book value is the historical (1990-2002) average price to book for ESIO. The company is trading at 3.80x sales. RISKS Cyclicality in the semiconductor equipment business is a function of the long lead times to build a fab (18 to 24 months) and the commodity nature of certain devices. Fab projects are often begun without a clear picture of future profitability due to device price fluctuations. As a result, periods of high investment are often followed by periods of extremely low investment as chipmakers are forced to reassess spending patterns against changes in expected profitability. Capital investment patterns of semiconductor makers are highly dependent on pricing and demand. Significant near term issues include weak demand for semiconductors and goods that consume semiconductors, in particular PCs (which account for half of all semiconductors produced). Overall health of the economy will also factor into the decision as a poor economic outlook will cause corporate IT spending to be pushed out. While several chipmakers have committed to capital spending budgets for the year and have ordered based on these budgets, there exists a risk that budgets are reduced and orders cancelled as slower demand results in less of a need to add capacity ESI, in particular, derives its revenue from 5 different businesses. While the company has leading market share in many of these areas, the small size of these markets (making the achievement of critical mass difficult) does not always help to offset potential market volatility. This creates the risk of misses in any given division in any given quarter. INVESTMENT THESIS We rate ESIO shares 3H (Underperform, High Risk) relative to our Marketweight rating on the semiconductor equipment industry. We Marketweight equipment names with the assertion that after dramatic out-performance, stocks will likely be near-term range-bound as anticipation of an order bottom is reflected in the stocks. We believe underlying concerns of chip and other component makers regarding the sustainability of this strength is keeping them from any aggressive spending. We therefore await firmer evidence of a sustainable order uptick to revisit our sector rating.ESI has large and defensible market shares in three core markets--DRAM repair (85% share), laser trimming systems (50%), and capacitor test and termination equipment (60%). As such, ESI is exposed to the dramatic upside potential inherent in these cyclical end markets. In addition to these strong positions ESI is also targeting the market for high density interconnect solutions. The ability to more closely pack electronics devices on a printed circuit board is a critical enabler to smaller, enhanced-functionality products. ESI's microvia drilling, miniature capacitor production equipment, laser trim, and machine vision businesses are all beneficiaries of the trend to smaller and denser PCB interconnects. ESI has successfully leveraged the company's core competencies and global infrastructure to enter new growth markets through acquisition or internal development. These include: capacitor manufacturing equipment, video pattern and optical character recognition. COMPANY DESCRIPTION Electro Scientific Industries, based in Portland, Oregon, is a manufacturer of precision production equipment to the broad electronics industry. ESI is the leading supplier of advanced laser systems used to adjust (trim) electronic circuitry and improve the yield of semiconductor memory devices. The company also produces high-speed test and termination equipment used in high-volume production of miniature capacitors. Additionally, ESI produces machine vision products and electronic packaging systems for manufacturers of printed circuit boards, electronics and other products.