Here is an article where the author seems favorably impressed with the ATE companies CMOS and TER as well as AMAT.
multexinvestor.com
Chip Off the Block
Recent Successes in Semiconductor Equipment
by Billy Shale
May 27, 1999
Semiconductor equipment companies are often viewed cautiously from an investment perspective because they tend to be subject to cyclical swings over the course of the fiscal year. Over the past few weeks, several semiconductor equipment companies have reported very successful quarters. Among the them, Teradyne Inc. (TER), Credence Systems (CMOS) and Applied Materials Inc. (AMAT). Wall Street analysts are generally encouraged by the previous quarter and predict growth for these companies in the future.
Earth Force
Teradyne Inc. (TER), founded in 1960 by current chairman Alexander d'Arbeloff, the descendant of Russian aristocrats, is the world's largest manufacturer of automatic test equipment (ATE) for the electronics industry, according to a recent Standard & Poor's report.
The company has greatly benefited from the development of increasingly complicated electronic systems over the last decade. Teradyne's products include systems to test semiconductors, circuit boards, telecommunications systems and software, as well as backplane connection systems, for the computer, communications and military industries. In 1998, 65% of the company's revenues came from systems to test semiconductors.
The company most recently made news for a deal, announced May 19, in which Teradyne sold multiple Catalyst SOC test systems to National Semiconductor Corp. (NSM). That company, a leading developer of system-on-a-chip integrated circuits, has had a long and successful relationship with Teradyne.
BancBoston Robertson Stephens' Sue Billat, Crosby Byers, and Sabine Clark recently reiterated their STRONG BUY investment opinion of Teradyne.
"The company recently reported a stellar quarter and we reiterate that, in our view, the company derives approximately 45% of its business from testers of devices commonly used in communications and networking applications," the analysts say. "Moreover, we believe that the company is supplying the leading producers of wireless communication ICs [integrated circuits] directly, as well as their chipmakers."
Teradyne's business has also grown with the growing Internet sphere because the company supplies testers for device end-use in Internet applications. Also, the trend in the electronics industry toward outsourcing to test houses has resulted in a 500% growth of demand from its business in Asia outside of Korea, Japan and Taiwan during the company's first quarter this year, the analysts report.
The biggest risk the analysts see for Teradyne is that the majority of the company's business comes from the semiconductor industry, which operates cyclically. However, little can be done to prevent upswings and downswings in the industry or the market. Shares recently traded at $55 3/4.
Seeing is Believing
Credence Systems (CMOS), which recently reported results for the second fiscal quarter that ended April 30, 1999, is a manufacturer of automatic test equipment (ATE) for the semiconductor industry. The company seeks to provide cost-effective equipment to test integrated circuits for high volume applications, such as networking and personal computing, multimedia, digital television, high-definition television and personal communications, according to a recent Standard & Poor's report. Credence also develops, licenses and distributes related software products.
Mark F. FitzGerald, vice president and electronics and semiconductor capital equipment analyst at Merrill Lynch, and Thomas R. Diffely, industry analyst of Merrill Lynch, recently gave Credence an ACCUMULATE investment rating based on the company's performance in the most recent quarter. Revenue for the quarter was $38 million, while earnings were $-0.11, better than the analysts' predictions of $28 million and $-0.24. Merrill Lynch raised its 12-month price target to $36. The stock recently traded at $30 1/4.
Business momentum increased throughout the quarter due to the introduction and success of new products, such as Quartet and Kalos. Quartet provides the "enhanced capabilities required to test consumer mixed signal products with 200 MHz I/O, 20 bit analog, video, and radio frequency (RF) input and output. Quartet directly addresses the cost sensitive needs of consumer related system-on-a-chip (SOC) devices," Standard & Poor's reports.
Kalos is a parallel system that provides multi-site testing and is designed to lower the overall cost of testing. Merrill Lynch analysts are also looking forward to the third fiscal quarter release of a product called ValStar, a system that enables the testing of extremely complicated devices.
Furthermore, the strengthened end markets throughout Asia, particularly in Taiwan and Korea, which account for more than 50% of the company's revenues, encourage the analysts. The number of new products expected from Credence in the second half of 1999 lead the analysts to believe the company will experience growth in the future.
Material Success
Applied Materials Inc. (AMAT), the company that supplies semiconductor manufacturing equipment to chip makers such as Intel Corp. (INTC), announced profits and orders for the second fiscal quarter (May) that far surpassed analysts expectations, Dean Takahashi reported in the Wall Street Journal on May 19. "The company provides the enabling technology that is critical for advanced semiconductor production," according to a Standard & Poor's report.
The world's largest semiconductor company with sales over $4 billion annually, was recently evaluated by analysts at Salomon Smith Barney. The analysts maintain their OUTPERFORM-high risk investment opinion of Applied Materials and adjust their earnings estimate for fiscal year 1999 to $1.56 from $1.24 based on the "'Michael Jordan' like quarter, with revenues/bookings/earnings better than expectations." Their price target of $76 remains unchanged. Shares of the stock recently traded at $61 9/16.
Despite Applied Materials strong performance in the second fiscal quarter, the analysts are concerned about the risk-to-reward ratio for the company.
"We see airpockets ahead as the market understands how to value the 'new Applied and the new equipment industry', which instead of having 2 year up-cycles and 2 year down-cycles, will probably see 3 quarter spurts and 2 quarter corrections," the analysts say.
Salomon Smith Barney considers numerous factors that the analysts believe may cause some unpredictability for shares of AMAT. First, they are concerned about "down to the wire" quarters due to a three month backlog at the company which the analysts believe implies a narrow margin of comfort. They believe the "explosive cyclical history" of the equipment industry indicates that the market will not react positively if this quarter's bookings are next quarter's revenues.
Furthermore, they are concerned about decreasing prices for dynamic random access memory technology, or DRAM, while capacity expansion accelerates. Also, two large semiconductor companies, Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. are increasing wafer capacity by 15% and 50% respectively which may pose a threat to Applied Materials, the analysts say.
On the other hand, the analysts were pleased to see "DRAM content down to 28% of orders or $390 million." They note that Applied's record of product excellence over the previous 15 years should not be taken for granted and that product execution over the last year has been an "eye-opening surprise. We estimate that Applied Materials will grow 45% in calendar 1999, while the industry will grow 16%."
Despite the ups and downs often seen in stocks in the semiconductor industry, analysts predict shares of AMAT, TER and CMOS will flourish. The growth and development of new products in the Internet sphere continue to prompt new, faster and less expensive products in the semiconductor industry.
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