Wednesday, October 25, 2006

Color on quarter: Cymer (NASDAQ:CYMI)

Several tier-1 firms are defending Cymer (NASDAQ:CYMI) this AM after the co issued in-line results but lowered Q4 guidance:

- Merrill Lynch notes Cymer's record 3Q results were in-line with expectations but the 4Q outlook fell short due to advanced laser shipment delays to 1Q07. Although disappointed with the pushouts, the firm believes this is a one quarter timing issue, rather than a change in fundamentals. Momentum should resume in 2007, both for revenues and margin expansion. Thus, they see weakness in the stock is a buying opportunity as are raising 2007 estimate and reiterate their Buy rating and $59 PT.

Cymer reported 3Q EPS of $0.68 above our $0.65 consensus estimate on 6% Q/Q revenue growth. Gross margins improved to 49.6% from 47.9% Q/Q. ASPs were up 10% to $1,064K. Higher utilization of light sources drove consumables (service and spares) to record levels at 50% of sales on a growing installed base.

3Q Orders of $142 million increased 11% Q/Q, slightly above ML's $140mm estimate. Cymer guided 4Q revenues to decline 5-7% Q/Q and gross margins of 48% due to XLA 300 (immersion) pushouts. These carry higher ASPs and margins so the impact on 4Q is large, but shipments should occur in 1Q07.

Firm lowered their 2006 estimates to reflect the XLA 300 pushouts from $2.45 to $2.30. 2007 estimate increases from $3.00 to $3.05 driven by operating margin expansion. They are initiating 2008 EPS estimate of $3.55.

- JP Morgan notes Cymer reported in line C3Q06 results ($0.72 PF/$0.68 GAAP) with decent margin expansion and impressive cash flow. Relative to C4Q06 guidance, this is the
first major disappointment that the co overtly missed in quite some time. While it is tempting to get negative on this story given the deep pot hole from a near-term fundamental momentum perspective, they are not. Cymer demonstrated its business model potential in C3Q06 with GMs at 50% and $50 million of free cash flow. Based on the probability of consistent above-average growth and secular margin expansion, combined with sudden valuation contraction, they are maintaining their OW rating and recommend buying the stock on weakness, aggressively in the low $40's or worse.

At $39.50 (post close), CYMI shares trade at 12.3x C2007 PF EPS estimate of $3.20 versus
universe average of 13.2x. Despite a near-term momentum pause in the rate of Cymer's financial progression, given the gestating immersion story, expanding secular margins, and laser-based litho growing as a percentage of total lithography market, the firm expects CYMI shares to offer secular above-average EPS growth potential, which should drive stock price outperformance over time.

Notablecalls: CYMI's a keeper here. No question about. JP's wrong here saying it's the first miss in quite some time. CYMI has guided "down" several times over the last 18 months. And it always bounces as the more savvy traders know there is still lots of demand for their tools. Just take a look at ASP's up 10%! CYMI's a winner here. Buying it down 12% will most likely make you money.


dcxavier said...

Short term, need to be wary of double/prospective ordering by foundries. Chip equipment orders are easily postponed and cancelled. CYMI lasers are hot items with long lead time. Big application has been flash. The "not ready for installation" statement by Akins has a suspicious smell to it, sounds a lot like Kulicke's "no room on the factory floor" statement that marked the Y2K peak. SNDK gross margins say there may be overhang in flash market, foundries may have overbuilt for now.

Agree that CYMI long term prospects are very good.

notablecalls said...

Think CYMI has a couple of good qtrs ahead of it. Love the comments, though.

I take it you work on the buyside?

dcxavier said...

I'm not in the financial biz at all, but have followed chip equips and a couple of other businesses closely for years. It's almost like a hobby.

I'm also a little suspicious of KLAC today. One thing that caught my eye is that yesterday's release said they have eight months of backlog. With the previous quarter's release, KLAC stated they had nine months of backlog. People seem focused on KLAC growth. Didn't listen to the CC, don't know if the question got asked or how it was resolved.

notablecalls said...


I think some expected KLAC to draw down backlog but management kept it steady around $998 mln (deferred revs +6% qoq to $503 mln). That $1.5 bln makes KLAC look almost a safe haven vs the other players.

I failed to answer your question, of course.