Wednesday, July 26, 2006

Color on quarter: Cymer (CYMI)

- Several firms are commenting on Cymer (NASDAQ:CYMI) following disappointing results and guidance announced last night. Surprisingly, we even have one firm upgrading the shares of heels of the news.

* Banc of America upgrades the shares to Buy from Neutral noting they had beencautious on the stock due to valuation. With the stock down over 25% since May (vs. -4% for the S&P500), they now think it's a good time to accumulate shares. Lithography remains firm's favorite segment as they believe adoption of new set of technologies (ArF/immersion) will increase ASP. Thinks these price increases will even mitigate any decline in unit shipments.

Unlike ASML, CYMI has about 85% market share and hence share gains will not fuel significant top-line growth; but the rising ASP's coupled with the company's relatively new business model should help the company maintain a high-20's operating margin and improve bottom line. Expect service revenues to grow.

Weakness in June bookings and backlog, down 5% and 7% respectively, will likely pressure the stock short term. But, they are confident that CYMI's market share dominance will track the lithography market trends over multiple quarters.

CYMI has pulled back over 25% since May. Firm is cutting 2007 EPS estimates from $4.12 to $3.03 on more conservative margin and ASP assumptions. Applying a 13x multiple on FY07 estimates, and adding back excess cash to they arrive at a price target of $45.50 (down from $55.50). Believes CYMI can easily support a 12x multiple as rising ASP's offset and decline in units to continue revenue growth.

* Prudential is lowering their tgt to $63 from $68 but maintains Overweight rating. Notes there is no change to their core thesis that deep UV lithography segment will grow faster than the equipment sector as a whole. Investors are concerned with the low level of backlog, but the firm expects orders and backlog will recover in 3q.

Firm is lowering FY07 estimates because the non-systems revenue could start to slow as utilization rates dip. New CY07 revenue estimate is $717M, down from $770M. Non-systems revenues trend with utilization rates, which they expect will take a slight dip in 3q due to seasonality. They $63 price target is based on 20 times new CY07 estimate of $3.30.

Notablecalls: CYMI is the fist mid-cap, growth Semi Equip name to warn. Is CYMI the canary in the coal mine? Note that on call, the co said that over last several weeks, sentiment in Semiconductor sector has become cautious but was quick to note that it's still seeing robust and growing demand and does not appear that customers have over-ordered. I suspect there will be traders looking to buy this one for a bounce but I expect te bounce will not last for long as CYMI will not be the only Semi name to warn.


dcxavier said...

For real early warning in the chip equip space, KLIC has been the historical indicator. The bonders they build are not affected by technology. Customer purchases are capacity builds and replacements. KLIC warned March 16.

notablecalls said...

Excellent point, dcxavier!