Follow up on the Smith Barney upgrade-here's the report
Salomon Smith Barney ~ April 23, 1999
04/23/99 Lam Research Corpora (LRCX $34.13,1-H,Tgt $51.00) Milind Bedekar --SUMMARY:--Lam Research Corporation--Semiconductor Equipment LRCX 3Q99 loss of $0.38 better than SSB - $(0.41) Street - $(0.48). Book-to-bill of 1.4. Etch and CMP market on a strong recovery mode. Raising FY99 est. to $(1.56) from $(1.87), FY00 to $1.67 from $0.70 and FY01 to $2.34 from $2.01. Raising price target to $51, or 25 times calendar 00 earnings estimate of
$2.04. Prior price target was $28, or 20 times prior est. of $1.40. Our concerns on the etch market growth rate have mitigated. More important 04/23/99 Lam Research Corpora (LRCX $34.13,1-H,Tgt $51.00) Milind Bedekar
is the spectacular operational turnaround by the management. --EARNINGS:-----------------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 06/98 EPS $0.09A $0.09A $(0.13)A $(0.05)A $(0.02)A
Previous 06/99 EPS $(0.70)A $(0.64)A $(0.41)E $(0.16)E $(1.87)E
Current 06/99 EPS $(0.70)A $(0.64)A $(0.38)A $0.10E $(1.56)E
Previous 06/00 EPS $0.00E $0.10E $0.25E $0.35E $0.70E
Current 06/00 EPS $0.24E $0.35E $0.50E $0.57E $1.67E
Previous 06/01 EPS $N/A $N/A $N/A $N/A $2.01E
Current 06/01 EPS $N/A $N/A $N/A $N/A $2.34E
Footnotes: EPS are fully diluted.
04/23/99 Lam Research Corpora (LRCX $34.13,1-H,Tgt $51.00) Milind Bedekar
--FUNDAMENTALS:-------------------------------------------------------------
Current Rank........:1-H Price 04/22/99......:$34.13
Prior Rank..........:3-H Target Price........:$51.00
P/E 06/99...........:N/AX 52 Wk Price Range...:38.37 - 8.81
P/E 06/00...........:20.4X Proj. 5yr EPS Grth..:12.0%
Return on Equity 98.:N/A% BookValue...........:$12.89
LT Debt-to-Capital..:40.11% Dividend............:$N/A
Revenue 1999........:$627.00 mil Yield...............:N/A%
Shares Outstanding..:38.40 mil Convertible.........:Yes
Mkt. Capitalization.:$1310.59 mil Hedge Clause(s).....:
Comments............:
04/23/99 Lam Research Corpora (LRCX $34.13,1-H,Tgt $51.00) Milind Bedekar
--OPINION:------------------------------------------------------------------
While we had always been impressed with the solid operational turnaround engineered by the Lam management team, our concerns on the growth rate of the etch market and the ramp of the linear polisher had prevented us from getting aggressive on Lam shares. However, the management team has done one of the most impressive operational turnarounds that we have seen in the equipment industry (our fiscal 2000 earnings estimate goes up from $0.70 to $1.67). In addition, the company believes that the etch market should be flat (or up or down slightly), which implies that the impact of damascene processing will not be felt in 1999. The company is taking the bold strategy of aggressively launching the linear polisher, which we believe is the correct approach because for at least for the next 1-2 years the Lam-OnTrak cleaner should continue to be the product of choice and as a result, the company should enjoy a very strong cleaning revenue stream. We are upgrading our rating from a 3H (Neutral, High Risk) to a 1H (Buy, High Risk). Our new price target is $51, or 25 times calendar 2000 earnings estimate of $2.04, while our prior price target was $28, or 20 times our prior calendar 2000 earnings estimate of $1.40.
Lam Announces A Solid Quarter...
Actual Estimate
Revenues $153 million $145 million Gross margin 35.5% 36% Operating expenses 45.1% 47% EPS $(0.38) $(0.41)
Lam announced a solid 3Q99 with revenues of $153 million, appreciably higher than our estimate driven by the strength in North American and Asia-Pacfic sales. The geographic break-out of revenues was US-40%, Europe-26%, Asia-Pacific-23%, and Japan-11%. With improving revenues, gross margins improved by 230 basis points sequentially, and were 50 basis points below our estimate. It will take 1-2 quarters for Lam to flush out the "lower priced backlog" and "higher cost inventory" after which we expect gross margins to be in the low 40's. The most amazing accomplishment of the quarter was operating expenses, which were 4% lower sequentially and are a full 36% below the peak level from 1Q/2Q98. In addition, management believes that the operating expense structure can be held flattish (in dollar terms) as revenues grow from $150 million to above $200 million, which translates to tremendous expense leverage. This was one of our concerns, which had prevented us from getting more aggressive in the past.
...Strong Book-to-bill Driven By The Strength In Asia-Pacific.
The company recorded a book-to-bill ratio of 1.4 with new orders of approximately $215 million. In addition, Lam expects bookings to be up slightly in June and hold flat in the September quarter. The bookings strength is driven mainly by Taiwan and Korea. The company believes that the strength in Taiwan is sustainable (we agree given the strong capacity utilization figures coming out of the foundries), while Korea could take a pause in 3QCY99 before picking up at the end of the year as new fab construction picks up. Over the past two years, the company had struggled with building backlog and with the strong bookings over the past two quarters, system backlog has climbed to over 5 months and should increase again in the June quarter.
Etch Market Should Be Flattish During 1999.
Given Jim Bagley's track record in predicting the depth of the 1998 downturn, Lam's industry growth forecasts are closely watched. The company expects the wafer fab equipment market to contract 5% in 1999, which is an upward revision from the previous forecast of a 12% contraction. Etch is expected to be flat (or up or down a few percentage points) and we are modeling a 2.4% growth for Lam Research in CY99 as the company begins to steadily reverse its market share losses from the 1996-1997 time frame. We had been concerned about the timing of damascene processing and its impact on the etch market, but given the growth in the etch market this year, we believe that damascene processing is pushed out at least until 2000.
The Company Is Aggressively Launching The Linear Polisher.
Recognizing very clearly that the Applied relationship will get very contentious over the course of the next 1-2 years, the company is taking the correct approach of aggressively attempting to ramp the linear polisher. We expect beta exit in the 1Q00/2Q00 and expect revenue shipments to begin beyond that time frame. We believe that Applied Materials controls close to 60%-65% of the market currently, and there is a clear opening for Lam Research to be #2 supplier over the first 3-5 years. A #2 supplier position in a $1.2 billion market is a sizable upside for a company with post CMP clean revenues of $75 million in 1998. There is a very delicate hand-off to come in 2000 as the Teres begins to ship in volume and Applied Materials and SpeedFam-IPEC design t heir own cleaners, however, this issue will not be a problem until the late 99/early 2000 time frame. We are modeling the company's clean/polisher revenues to increase from $75 million in 1998 to $120 million in 1999 to $150 million in 2000.
Raising Estimates, Rating And Price Target.
We are raising our fiscal 1999 revenue forecast from $589 million to $627 million and our fiscal 2000 revenue forecast from $800 million to $900 million and our fiscal 2001 revenue forecast from $960 million to $1.06 billion. With lean manufacturing and material cost reductions kicking in, we expect the company to improve its gross margins from 35.7% in fiscal 1999 to 42.9% in fiscal 2000 and 45.8% in fiscal 2001. Most important is the company's view that it can curtail the operating expense growth to a small single digit figure per quarter, which translates to a significant operating expense leverage. We are modeling operating expenses to decrease from 45.5% of sales during fiscal 1999 to 34.8% in fiscal 2000 and 31.9% in fiscal 2001. We are raising our fiscal 1999 earnings estimate from $(1.87) to $(1.56), our fiscal 2000 earnings estimate from $0.70 to $1.67, and our fiscal 2001 earnings estimate from $2.01 to $2.34. We are also raising our secular earnings growth forecast up to 20% from 10%, due to the operational improvements. Our new price target is $51, or 25 times calendar 2000 earnings estimate of $2.04, while our prior price target was $28, or 20 times our prior calendar 2000 earnings estimate of $1.40. Trading at 17 times calendar 2000 earnings, and 1.5 times calendar 2000 sales, versus the typical mid/large cap equipment average of 20-28 times calendar 2000 earnings, and 3-4 times calendar 2000 sales, we believe that the shares offer an attractive risk/reward. We are upgrading our rating to 1H (Buy, High Risk) from 3H (Neutral, High Risk). Lam is a turnaround story appropriate for investors seeking long term value in the equipment sector.
|
