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To: IQBAL LATIF who wrote (12663)	10/23/1997 10:38:00 PM
From: George Mc Geary	Respond to of 50167

IQ, Worth a quick read. From: +Ian Stromberg Thursday, Oct 23 1997 5:08PM EST Headline: Semiconductor Equipment: DRAM Equip. Investment An Opportunity Not A Risk Author: Edward C. White, Jr., CFA Company: AMAT, KLAC, KLIC, LRCX, PRIA, TER, LTXX, NVLS, EGLS Country: IND CUS Industry: ELECTS,SCITEC,SEMICO Today's Date : 10/22/97 * There has been concern about recent DRAM pricing trends and the adverse impact this may have on semiconductor capital investment. Our work suggests that there is upside rather than downside to DRAM related equipment demand. * We have done several regressions to determine whether changes in DRAM prices are a significant factor behind changes in semiconductor equipment revenues. The R-Squared values from most of these regressions were low (under 50%). * The highest correlation was between price/bit changes over a 9-month period and subsequent yr/yr changes in equipment spending. Spending usually does not decline unless DRAM prices are down 33% or more over a 9-month timeframe. * The statistics confirm intuition. Chip capital budgets tend not to get cut unless DRAM price declines are worse than normal learning curve declines for a long time. Currently, price/bit numbers are down 8% over the past 9 months. * Many equipment companies now derive a smaller percent of revenues from DRAM chip makers than previously, but have not assumed a DRAM recovery in their guidance to analysts. This creates the potential for upside EPS surprises. Highlights: 1. We will host a conference call at 10:30 A.M. today to discuss our generally constructive outlook on the semiconductor production equipment industry, and our DRAM regression analysis. Please call your Lehman Brothers sales representative for more details. 2. Among the companies which stand to benefit the most from a pickup in DRAM based semiconductor capital investment would be KLA-Tencor (KLAC, $61 7/8, Rated 2, Footnote C). At the peak of the DRAM cycle, the company derived 40- 50% of its revenue from DRAM chip manufacturers. The percentage is now down to 10%-15%. Moreover, although the company is optimistic on its short to intermediate term outlook, it has not factored a major recovery in DRAM related demand into its outlook. If DRAM manufacturers' spending recovers, EPS estimates for KLA-Tencor have to go up.