Archival Post for Reference - ASMLF Article from Barron's
Here is an article from Barron's on ASMLF:
June 1, 1998
Stepping Up
Despite Asia's woes, chip-equipment maker ASM Lithography should prosper
By RICHARD EVANS
Market Action
Founded in 1984, ASM Lithography Holding has risen to success and snatched market
share from established Japanese rivals by thinking small. Extremely small. The Dutch
company, whose shares are traded in Holland and in the U.S. on Nasdaq, makes highly
complex production machines known as steppers, which print the circuit patterns on
microchips for computers, cellular phones, TV decoders and automobiles. Thanks to
recent breakthroughs involving optics and lasers emitting deep ultraviolet light, the width
of those circuit patterns is now down to .2 microns, or 1/400th the width of a human
hair.
Indeed, the $150 billion global semiconductor industry is being energized by a race to
make chips both smaller and more powerful. And ASM Lithography, say its managers
and many analysts, is setting the pace. Its strategy focuses on creating premium products
that can allow chipmakers to become more productive and profitable.
"If you're in the business of making computer memory chips, then you need to make
more of them faster and cheaper than the competition," explains Charles Elliott, a senior
technology analyst covering Europe for Goldman Sachs and a big fan of ASM's stock.
"That is exactly what ASM Lithography is doing. Their stepper machines cost 20%
more, but they allow 30%-40% more production yield."
The company's shares recently were trading around 39, or almost 33 times 1997
earnings of $1.20 a share (after adjusting for a 2-for-1 stock split on May 7).
Elliott sees profits rising 24% this year, 45% in 1999 and around 30% in each of the
following two years. His year-end price target for the stock is $55. One institutional
investor with a "decent-sized position" in the shares has even greater expectations. "The
stock could double in the next 12-24 months," he insists.
Many semiconductor makers have begun to see the benefits of ASM's technology.
Productivity and cost are major issues when they decide to buy 20 or 30 stepper
machines, which can cost up to $8 million apiece. Offering machines that are faster and
therefore more productive than the competition's, ASM has seen its global market share
rise from just 8% in 1990 to 25% today, reports SBC Warburg Dillon Read in a recent
report. Thus it leapfrogged over Canon to become No. 2 globally behind another
Japanese company, Nikon. By the year 2000, the Dutch firm could own more than a
third of the market, possibly surpassing Nikon.
"Neither Canon or Nikon can catch up with us in terms of productivity," claims Gerard
Verdonschot, ASM's chief financial officer. "We are taking customers away from both
of our competitors." That claim is supported by some analysts and institutional investors.
A number of major semiconductor producers, including Motorola, Texas Instruments
and Siemens, are currently evaluating ASM steppers. Big orders from one or more of
them could further boost the company's market share and earnings.
Steppers, the machines ASM and its competitors produce, are the single most important
and costly piece of equipment used in manufacturing microchips. They photographically
imprint circuit patterns on the large silicon wafers that are later cut up into dozens or
hundreds of chips. They must also move the wafer, inch by inch, in hundreds of discrete
steps that allow all parts of the large wafer slabs to be photographed. Obviously, the
larger the wafer the machine will hold, the more microchips can be photographed at one
time. The faster the machine works, too, the more productive the manufacturing process
is.
Analysts maintain that ASM's steppers are of higher quality because they use a modular
architecture.
Most steppers must be built in the factory and then disassembled, shipped to the
customer and reassembled. This can throw off their precise and tiny movements,
creating quality-control problems during production.
ASM machines, however, are built from modules, which can be shipped to the
customer and smoothly and precisely assembled in a fabrication plant, reducing the
potential for problems.
While the semiconductor market, and especially that for the DRAM (dynamic random
access memory) chips used in personal computers, is currently plagued by falling prices
and oversupply, companies launching leading-edge products still must upgrade their
steppers to accommodate thinner circuit line widths of 0.20-0.25 microns. Only
machines like ASM's, which use deep ultraviolet lasers, can achieve such microscopic
precision.
"This is a very well-positioned company," says Andrew Griffin, a seasoned technology
analyst with BancAmerica Robertson Stephens in London. "Their new deep UV
technology looks likely to win them more market share."
Semiconductor makers that don't invest in such new technology simply will be unable to
produce the new generation of 64-megabit microchips or the coming generation of
256-megabit devices. Each generation is a quantum leap beyond its predecessor,
offering four times more memory and making previous chips largely obsolete.
ASM's position as technology leader allowed it to grow profits by 51% and boost
earnings per share from (a split-adjusted) 80 cents a share in 1996 to $1.20 in 1997. In
1997, ASM's earnings were swollen by the sale of a stake in Cymer, a
computer-equipment manufacturer. Excluding the charge, earnings would have been
$1.08 per share. That was fairly remarkable in a year during which global microchip
oversupply and Asia's economic turmoil led to a 70% drop in the price of DRAM chips,
battering the stocks of many chipmakers. But no one expects those kinds of gains this
year, and opinions vary as to when the next big upturn in microchip demand will come.
A vague consensus now has it that a true revival will begin early next year as Asia rights
itself and consumer demand strengthens in Continental Europe.
Further turmoil in Asia, however, may darken the investment picture for ASM, at least
over the short term. The recent Korean currency collapse may lead to a dip in its sales,
as Korean chipmakers are forced to cut capital expenditures by 40%-50% this year.
Most worrying is the position of Samsung, the Dutch company's largest single customer,
which accounts for around 20% of total sales. Questions surround Samsung's ability to
pay for new steppers it has ordered, although ASM maintains that the concerns are
overblown.
"The Koreans are taking all the machines they have ordered and are sticking to their
payment schedules," says ASM's Verdonschot. Otherwise, he adds, they would have to
scrap plans to begin production of 64-megabit chips -- a core requirement of their
current strategy.
Concern about Samsung has held down ASM's stock, which trades as American
depositary receipts in the U.S. It recently was around 39, midway between its 52-week
low of 23 1/4 and its high of 53 7/8 . But a backlog through the first quarter of some
$800 million in firm orders from other customers should help ASM endure any
problems caused by Samsung's difficulties.
And while little, if any, growth in the stepper market is anticipated for the rest of 1998,
ASM's sales are likely to rise as it takes a bigger slice of a relatively stable pie.
Longer-term, from 1999 to 2002, analysts expect the market for steppers to grow at
about 18%-20% annually.
Without a doubt, the greatest protection against market downturns is product quality.
"There is a big difference between volume suppliers and technology enablers," points out
Leslie Manookian, director of European research for Alliance Capital Management in
London. "ASM Lithography's position is unique. They're the clear leader, and
companies just cannot make smaller and faster chips without them. They are not immune
to the market cycle, but they ride it better than others."
Ironically, a predicted contraction in the Japanese microchip market during 1998 could
actually help ASM, while hurting some of its rivals. The Dutch firm has never managed
to acquire a toehold in Japan, whose market has been jealously guarded by Canon and
Nikon. The big Japanese semiconductor houses have continued to buy Japanese, but
those days may be coming to an end as they try to become more efficient in a shrinking
market.
"Even the Japanese companies will have to reassess their position at some point,"
Manookian predicts, "especially when they see what is clearly better technology
elsewhere."
ASM enjoys two added advantages over its Japanese competitors: It outsources 90%
of production, and it has a clean balance sheet, with no long-term debt. Outsourcing
allows the company to cut production in lean times without continuing to pay for
unproductive plants and personnel. "In the early days, we could not afford to produce
machines ourselves," points out Verdonschot, "but this has turned out to be a benefit for
us. We can control our costs a lot more because of this."
Most analysts believe ASM will remain the technology leader in its niche until at least
2003, when the semiconductor industry takes the next leap to non-optical lithography.
By then, microchips will have become so minuscule and so powerful that their circuits
will be too fine to be etched by light, and engineers at ASM and its competitors
probably will turn to steppers that use ion beams or some other energy source.
At that point, the game will change, but ASM certainly has as good a chance as anyone
of coming up with the equipment that will be needed. And until then, the high-tech Dutch
outfit should gain market share in good times and manage downside risks if things get
tough. "This company's sales could drop by 50% and they would still break even,"
stresses Goldman Sachs' Charles Elliott. "No competitor is in a position to be able to do
that."
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