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Technology Stocks : Helix Technology, a cold play on semiconductor equipment -- Ignore unavailable to you. Want to Upgrade?

To: mopgcw who wrote (1182)	10/14/2004 9:08:23 PM
From: mopgcw	Respond to of 1227

GS: AMAT: REDUCING EPS ESTIMATES ON WORSE THAN EXPECTED BUSINESS OUTLOOK 52-Week Range US$26-16 YTD Price Change -26.96% Market Cap US$27.8bn Current Yield — Summary: On the heels of our qtr-end checks that highlighted a significantly weaker environment over the last several weeks in the Semi Equipment industry, which was confirmed last night by the worse than expected order and shipment outlooks provided by Lam and Novellus, we are reducing for Applied Materials our CY04 and CY05 EPS estimates: CY04 EPS estimate goes to $1.00 from $1.08 (Street $1.01) and CY05 EPS estimate goes to $0.85 from $1.35 (Street $0.99). While we had expected SAB-101 (a revenue recognition accounting principle that allows sales to be recognized on systems that were shipped when business was more robust) to allow revenues to remain flattish over the next few quarters, it appears following Lam and Novellus' reports as if management's are choosing to slow down shipments and manage backlogs, which has the effect of driving revenues down sooner than we expected. Stock downside likely as market is pricing-in 10% long-term free cash flow growth while the industry has grown at a 1% CAGR over the last two cycles. REDUCING CY04 AND CY05 EPS ESTIMATES AS QUARTER-END CHECKS THAT HIGHLIGHTED A SIGNIFICANTLY WEAKER ENVIRONMENT OVER THE LAST SEVERAL WEEKS WERE SUPPORTED BY LAM AND NOVELLUS ON WEDNESDAY NIGHT. On the heels of our quarter-end checks that highlighted a significantly weaker environment over the last several weeks in the Semi Equipment industry, which was confirmed last night by the worse than expected order and shipment outlooks provided by Lam Research and Novellus Systems, we are reducing for Applied Materials our CY04 and CY05 EPS estimates: CY04 EPS estimate goes to $1.00 from $1.08 (Street $1.01) and CY05 EPS estimate goes to $0.85 from $1.35 (Street $0.99). While we had expected SAB-101 (a revenue recognition accounting principle that allows sales to be recognized on systems that were shipped when business was more robust) to allow revenues to remain flattish over the next few quarters, it appears following Lam and Novellus' reports as if management's are choosing to slow down shipments and manage backlogs, which has the effect of driving revenues down sooner than we had expected. VALUATION DICTATES DOWNSIDE RISK AS LONG AS DISCONNECT BETWEEN EXPECTATIONS AND LIKELY REALITY PERSISTS. Given our normalized free cash flow estimate for Applied Materials of $0.44 (generated over the course of the full cycle from 1999-2002), we calculate that the market is pricing-in a long-term free cash flow growth rate for Applied Materials of 10% (derived from the equation: stock price = normalized FCF/share * (1/(WACC-G))). Especially given the fact that this is a terminal free cash flow growth rate and that the Semi Equipment market has grown at a 1% CAGR over the course of the last two peaks, we believe that a 10% free cash flow growth rate expectation is far too aggressive. As a result, we think there is downside risk for the stock as long as the market continues to expect a short and shallow downturn while the fundamental reality more likely points to a normal downturn with several quarters of significant order declines. I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their