Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Zeev Hed who wrote (1682)	12/24/1998 10:53:00 AM
From: j. w. kampfe	Respond to of 3069

Target increased at the pru: EQUITY RESEARCH VEECO INSTRUMENTS DECEMBER 23, 1998 -------------------------------------------------------------------------------- WE ARE RAISING OUR PRICE TARGET ON IMPROVING FUNDAMENTALS AND RELATIVE VALUATION. RAISING TARGET TO $62 FROM $50. Subject: Veeco Instruments (VECO-51)--OTC OPINION Current: ACCUMULATEAnalysts: John W. Pitzer (xxx) xxx-xxxx Risk: HIGH 12-Month Target Price: TO $62 FROM $50 --------------------------------------------------------------------------------Ind. Div.: -- Yield: -- Shares: 14.9 mil. 52-Wk.Range: 54-18--------------------------------------------------------------------------------EPS FY Year P/E 1Q 2Q 3Q 4Q Actual 12/97 $ 1.25Current 12/98 $ 1.04E 49.0X $ 0.31 $ 0.24 $ 0.26 $ 0.25ECurrent 12/99 $ 1.40E 36.4X $ 0.29E $ 0.33E $ 0.37E $ 0.41ECurrent 12/00 $ 2.00E 25.5X-------------------------------------------------------------------------------- Investment Highlights (1) New 12 month price target of $62 up from $50. New price target represents 20% upside from current prices but stock is no longer at bargain prices.(2) Increased target price based on improving 1H99 PC unit and semiconductor demand as well as current valuations on the disk drive stocks.(3) Investors are discounting disk drive fundamentals, current valuations of disk drive stocks at historical highs - Veeco should benefit from investor sentiment.(4) Veeco's fundamentals are improving modestly (reflected in our estimates). We would expect a book to bill above parity in the December quarter.(5) Veeco continues to be the dominant supplier of equipment to the data storage industry. Unique positioning with good growth prospects in GMR technology transition.(6) We are currently estimating EPS of $2.00 for 2000. Our price target is based upon a 27.5 P/E multiple on potential 2000 earnings of $2.25. Investment Discussion We are raising our 12 month price target on shares of Veeco to $62 from $50. Our new price target is based upon multiple expansion as the demand environment for semiconductors and PCs is becoming more clear, with a positive bias for 1Q99. We are increasingly finding evidence that 1Q99 will at least mute the typical seasonal trends and potentially be flat with 4Q98. 1Q99 is being helped by relatively good end market demand and low inventory levels. During peaks and troughs of capacity cycles, equipment stocks do not tend to trade in conjunction with company specific fundamentals but rather in-line with industry news. Orders in 4Q98 (Dec) should provide the basis for a positive book-to-bill. At the end of 3Q98 (Sep), we had thought that Veeco would post a book to bill for 4Q98 (Dec.) of approximately 0.9, implying bookings in the range of $47-48 million versus our revenue estimate of $50.5. We now believe that the Company will have a positive book to bill for the quarter ending December. Confidence in estimates is increasing, but no need to raise numbers at this time. We are currently estimating revenue and EPS for 4Q98 of $50.5 million and $0.25 versus street consensus of $0.26. We believe that the Company should at least meet street consensus and could post slight upside in the quarter. However, we continue to believe that our estimates for 1999 of $1.40 are the most realistic and do not see a reason to increase numbers at this time. Meaningful sequential gains in revenue and bookings is estimated for 2HFY99. Historically, as fundamentals bottom, investors begin to transition away from trough valuations towards earnings potential during the next growth cycle. Given that visibility is limited even into the next quarter, our 2000 EPS estimate of $2.00, represents what we believe to be realistic, but conservative assumptions in the business. Good technology exposure as industry migrates to MR and GMR heads should allow Veeco a quicker recovery path. 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 in-line metrology equipment. Metrology should will become increasingly more important in the manufacturing of next generation heads. 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. Valuation still shows upside potential, however, the stock is no longer a bargain. Historically, when the industry troughs and sequential revenue and EPS growth transitions from positive to negative, investors have been willing to forgo trough valuations based on revenue and book value and begin to value stocks versus earnings prospects in the next growth cycle. We have contended that valuations will begin to discount appropriately to earnings potential in 2000E. In fact, the key investment theme for our companies in the current environment is leverage in the operating model as revenue growth resumes. On a price to earnings ratio, stocks typically look expensive as fundamentals begin to ramp from a trough environment simply because typically earnings estimates are too conservative. Range of valuations from the trough to the expected growth cycle. In the fall of 1996 as growth resumed in the industry, Veeco traded between 20.2 and 28 times 1998 earnings potential (1998 turned out to be a negative growth year for the industry). Our new price target of $62 represent that 27.5 times our potential 2000 EPS estimate of $2.25. Note that our current EPS estimate for 2000 of $2.00 is based upon 20% year to year revenue growth. Our potential estimate of $2.25 takes into consideration leverage in the model if revenue year to year growth were to accelerate from 20% to 25%. In addition, Veeco is one of only a few stocks in our universe which is still significantly below it all time high of $73 set in September of 1997. Table 1SCE Universe - Current Prices vrs. All time high* Current All Time High % Difference AMAT $44 $54 22% ATMI $24 $42 75% ESIO $41 $61 49% NVLS $57 $66 16% VECO $51 $73 43%* Highs were set in the fall of 1997, approximately 60 weeks ago. Appreciation yes, bargains no. Typically, investors discount 6-9 months ahead of an expected pick-up in sequential bookings growth. We are cautious that discounting this time around seems to be occurring more quickly and to a larger degree than in past cycles - however, an important characteristic of each successive cycle is higher trough valuations and more significant discounting out to growth portions of the cycle. At current valuations, while stocks still have room for appreciation, the margin for error has narrowed and stocks will be more vulnerable to the vagaries of day to day marginal news coming from the semiconductor and PC industries. As such, and as opposed to 4-5 weeks ago, we view these stocks more as trading vehicles than investments near-term. Prudential Securities Incorporated makes a primary over-the-counter market in the shares of Veeco Systems Inc, Applied Materials, ATMI, Inc., Electro Scientific Industries, Novellus Systems, and Veeco Instruments.