All -- Lehman take on LSCC and chips in general:
Headline: Lattice Semiconductor: LSCC Announces Revenue and EPS Shortfall. Author: M. A. Gumport, CFA 1(212)526-5368 Rating: 1 Company: LSCC, ALTR, AMD, MU, NSM, XLNX Country: EPS CUS Industry: SEMICO Ticker : LSCC Rank(Prev): 1-Buy Rank(Curr): 1-Buy Price : $36 1/2 52wk Range: $75-35 Price Target (new): $40 Today's Date : 06/10/98 (old): $70 Fiscal Year : MAR ------------------------------------------------------------------------------ EPS 1998 1999 2000 2001 QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.60A 0.58E 0.40E 0.72E 0.48E -.--E 0.63E 2nd: 0.62A 0.59E 0.40E 0.75E 0.48E -.--E 0.66E 3rd: 0.57A 0.63E 0.42E 0.78E 0.52E -.--E 0.71E 4th: 0.58A 0.68E 0.45E 0.80E 0.57E -.--E 0.75E ------------------------------------------------------------------------------ Year:$ 2.37A $ 2.48E $ 1.67E $ 3.05E $ 2.05E $ -.--E $ 2.75E Street Est.: $ 2.53E $ 2.48E $ -.--E $ -.--E $ - -E $ - -E ------------------------------------------------------------------------------ Return On Equity: 13.0% Proj. 5yr EPS Grth: 25.0% Shares Outstanding: 23.9 Mil. Dividend Yield: 0.0% Mkt Capitalization: $872.4 Mil. P/E 1999; 2000 : 21.9x; 17.8x Book; Price/Book: $18.19; 2.01x Disclosure(s): C Net Cash per Share: $11.18 Revenue (FY99E): $202.5 Mil. ------------------------------------------------------------------------------ ** POST-CLOSE 6/9, LSCC INDICATED THAT, VS. MARCH FY4Q98, JUNE FY1Q99 SALES WILL DECLINE 20%, EPS DOWN 30%. SEES BROAD BASED SHORTFALL IN END DEMAND. ABOUT 20% OF THE SHORTFALL IS PCs, THE REST MAINLY DATACOM. JAPAN WAS ALREADY EXPECTED TO BE DOWN 20%, BUT US AND EUROPE, TOO, NOW LOOK DOWN.
** PROJECTIONS AND TARGET CUT. NOW IS NOT THE MOMENT TO BE IN CHIP STOCKS. WE SEE 7% DOWNSIDE RISK IN OUR XILINX SALES MODEL. CHIP INDUSTRY SALES NOW LOOK DOWN ABOUT 5% IN 2Q98 VS. 1Q98, AND THE INDUSTRY COULD BE DOWN 7-8% THIS YEAR (OLD: -3%). ------------------------------------------------------------------------------ POST CLOSE 6/9 LSCC INDICATED JUNE FY1Q99 SALES AND EPS WILL DECLINE SEQUENTIALLY 20% AND 30% RESPECTIVELY. Sales to Japan had already been anticipated to decline 20% (about $2 mil.), but it now appears that the US and Europe will decline $8-10 mil. (about 15-20%) with each sector down $4-5 mil. The sales shortfall was described as broadbased. 20-30% of the $8-10 mil. decline is attributed to PC related customers, and the remainder is largely datacom oriented. PC related customers are about 10% of sales, other computation customers about 15%, and datacom, we believe, is the bulk of the remainder. The US was particularly weak in PCs and Europe particularly weak in datacom. Distribution is about 45% of sales, and US distribution business was flat while OEM sales declined sharply. OEM business was also quite weak in Europe although distribution sales also declined due to the absence of some 1-time shipments seen in the prior quarter.
EPS PROJECTIONS CUT; TARGET CUT. Reflecting the guidance for June FY1Q99 and the expectation business begins to recover at the end of this calendar year, we now project FY99 EPS at $1.67 (old: $2.48), FY00 at $2.05 (old: $3.05), and FY01 at $2.75. Reflecting the lower level of results, we have cut our 1-year target to $40 (old: $70). We would expect the stock today to open in the $25 range.
NOT MUCH GOOD TO BE SAID, BUT ONE ITEM IS CRITICAL: THE BUSINESS MODEL HAS NOT SUFFERED. Surprisingly (given the magnitude of the shortfall), LSCC still anticipates a 60% gross margin and a 20% net margin, roughly stable vs. recent quarters. We will reassess our 1 rating after today's opening but, at the presumed lower trading level, we continue to see LSCC as among the premier smaller chip makers with substantial upside during the next year once industry conditions improve.
IS THIS A MARKET SHARE PROBLEM? Investors today undoubtedly will ask whether LSCC is suddenly losing massive amounts of market share (LSCC had been the key market share winner in the advanced programmable logic device market in recent years). Xilinx (XLNX-$36;1) is indicating sales roughly flat (our model at +2% now looks optimistic) and apparently Altera (ALTR-$35;NR), too is indicating a similar trend.
LSCC INDICATES DEMAND IN THE INDUSTRY IS VERY POOR, AND WE VIEW OUR OTHER EPS ESTIMATES AT SOME RISK. Certainly, it seems possible XLNX will experience a 5% sales decline this quarter, and prospects for next quarter likely will have to be reduced as well (2% growth could easily become a 5% decline).
CLEARLY, NOW IS NOT THE MOMENT FOR MAJOR EXPOSURE TO CHIP STOCKS. National Semiconductor (NSM-$16 1/16;3) has already indicated its sales will be down 20% sequentially this quarter. We understand Advanced Micro Devices (AMD-$18 5/8;3), too, has experienced a steep decline in its non-x86 business (our model at -8% may not be aggressive enough). DRAM prices have declined at least 30-40% during the past month (our assumption that Micron's (MU-$25 7/8;4) bit sales grow 16% in the latest quarter may be slightly rich). Shortfalls have been reported by HP. The 5 factors negatively impacting the industry still seem at work: 1) A slowing US economy, 2) a steep decline in Asia/Pac, 3) A necessary slowdown in IC unit growth (at +35% in July 1997; now at just 4% in April 1998 and likely near a bottom), 4) Excess XMAS PC inventory, 5) A move to a "build to order" model. In particular, we believe DELL recently has gone to a 4 days of inventory model. If other manufacturers were to move to the same model, it would cause nearly a 50% shortfall in sales for a quarter.
STILL BELIEVE 4Q98 WILL SEE AN UPTURN. CHIP STOCKS SHOULD BOTTOM IN JULY-OCTOBER TIMEFRAME. Most importantly, we do not anticipate a world recession. Meanwhile, chip unit volume growth has now slowed to below trend growth, and, eventually, we expect the current inventory adjustment to run its course. A few months before the fundamentals visibly begin to improve (4Q98), chip stocks should begin to move up again.
Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. |
