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Technology Stocks : Veeco Instruments-Who? -- Ignore unavailable to you. Want to Upgrade?

To: Carl R. who wrote (1626)	11/8/1998 5:40:00 AM
From: j. w. kampfe	Read Replies (2) \| Respond to of 3069

Prudential research update: 11/6/98 VECO: COMMENTING ON RECENT STRENGTH IN STOCK PRICE Subject: Veeco Instruments (VECO-32 13/16)--OTC SEMICO OPINION Current: ACCUMULATE Analysts: John W. Pitzer (212) xxx-xxxx Prior: Risk: HIGH 12-Month Target Price: $40 Ind. Div.: -- Yield: -- Shares: 14.9 mil. 52-Wk.Range: 50-18 EPS FY Year P/E 1Q 2Q 3Q 4Q Actual 12/97 $ 1.25 Current 12/98 $ 1.04E 31.5X $ 0.31 $ 0.24 $ 0.26 $ 0.25E Current 12/99 $ 1.40E 23.4X $ 0.29E $ 0.33E $ 0.37E $ 0.41E Current 12/00 $ 2.00E 16.4X Overview: Recent Stock Strength Is Classic Discounting. The stock has been strong over the last two trading sessions. We visited with senior management the week of 10/26 before initiating coverage and there has been no change in company fundamentals. Recent stock strength has been a classic example of discounting in the equipment industry. The main growth driver for VECO is in the data storage industry and the stock tends to trade in tandem with the drive companies; Seagate (SEG-29 3/8, Not Rated); Western Digital (WDC-13 5/8, Not Rated); Quantum (QNTM-21 1/16, Not Rated); Read-Rite (RDRT-13 9/16, Not Rated); Applied Magnetics (APM-5 , Not Rated). The Sentiment On Drives Has Become More Positive. Disk drive stocks have been strong over the last few trading sessions prompted by investors perception that the industry could be rebounding. A positive perception of the data storage industry should drive stock appreciation at VECO. We continue to like the Company's prospects as VECO dominates the equipment market for the data storage industry. Clearly if investors are beginning to warm up' to the data storage industry, you should put VECO in front of them as perhaps a lower risk vehicle into the often violent disk drive cycles. Our Estimates. Our estimates for FY98 - $205.8 million in revenue and EPS of $1.04 street consensus is $1.05. FY99 - $217.3 million in revenue and EPS of $1.55 street consensus is $1.58. FY00 - $260.7 million in revenue and EPS of $2.00 street consensus is $2.00 Investment Thesis: (1) Driving a portfolio growth strategy in the data storage industry. Veeco Instruments is driven by the growth prospects in the data storage industry, which represents over 50% of the revenue stream. The Company supplies equipment which is used to manufacturer magnetic heads for the data storage market. Manufacturing a recording head is not that dissimilar to manufacturing a semiconductor-there are deposition lithography and etch processes in both-though each industry has their unique challenges. The Company is the premiere supplier into the data storage industry and is in essence the Applied Materials (AMAT-34 7/8, Accumulate) and the KLA-Tencor (KLAC-33 3/16, Not Rated) of the data storage market. We believe it is fair to characterize the manufacturing dynamics in the drive industry as very similar to that of the semiconductor industry with a trend of becoming more capital intensive. Historically drive companies have spent 10-15% of revenue on capital expenditures. We believe this is trending to the 17-20% level. (2) Competition in the marketplace is highly fragmented and financially small. To put the difference into perspective, VECO spends more on R&D each year than any single competitor generates in revenue. (3) Good technology exposure as industry migrates to Magneto-Resistive (MR) and Giant Magneto-Resistive (GMR) heads. There are technology trends in the data storage market where VECO is well positioned. Similar to the transition to 0.18, there is currently a transition in the data storage market from MR to GMR head types-the transition is being driven by the universal mantra of technology-smaller, faster, cheaper. This should allow Veeco to benefit in earlier 1999 as the industry migrates. In addition, the Company's markets continue to experience accelerating growth as Veeco finds new applications at each technology. Historically the company has addressed on the etch market. However, as the industry migrates to MR and GMR, the company has positioned itself to provide deposition and metrology equipment. (4) The data storage equipment industry may rebound more quickly than semiconductor equipment. The data storage industry entered into the cyclical downturn approximately 6 months before the SCE industry. In addition, the data storage industry did not add as much capacity during the growth years as the semiconductor industry did. Therefore, we believe that the data storage industry should come out of the spending downturn more quickly than the semiconductor industry. We continue to believe the key metric to monitor will be demand levels in 1Q99 for PCs on a unit basis, as demand will greatly influence the capital budgets of the drive companies in 1999. (5) Expectations for flat growth over next several quarters. As a result of a near-term conservative stance by drive manufacturers, we are expecting somewhat flatish quarters from Veeco in 4Q98 and 1Q99-quote activity has picked up and we are confident with the technology transition expected in 1Q99 that fundamentals are at a bottom and modest sequential upticks are the next direction. The Company recently reported 3Q98 results, book to bill for the quarter was 0.86-much better then in SCE-and it is our belief that bookings troughed and should be at least flat to slightly up in 4Q98. (6) Valuation on 2000E provides good upside from current levels. This Company has a $2.00 earnings potential in 2000E. Historically it has traded at a premium multiple to the group and has a dominant market position. We have a 12 month price target of $40 or 20 times our 2000 EPS estimate.