Wednesday, January 10, 2007

Calls of Note Part 2

- JP Morgan is adding OW-rated Mattson (NASDAQ:MTSN) to the JPMorgan U.S. Equity Focus List today with a Feb. '08 stock price target of $14, 14x their C2008 GAAP EPS estimate of $1.00.

In October 2006, Mattson pushed its upside gross margin target of "mid 40%" to C2Q07 from C4Q06. In general, the inability to deliver gross margin expansion has hindered MTSN shares over the past year while the rest of the fundamental story, including strong products, share gain, and operating expense discipline was solid.

Firm expects Mattson to deliver C4Q06 orders at the low end of guidance, but to also deliver sequential order growth in C1Q07 and C2Q07. Importantly, they believe C4Q06 orders carried higher gross margins than revenues as the company is successfully converting existing customers to its new higher margin products and is receiving orders from new customers at higher margins.

Solid penetrations of memory customers such as Samsung and Toshiba in 2006 should proliferate further in 2007, and strong exposure to Taiwanese memory makers should also drive order strength in C1H07. In C2H07, Mattson should benefit from its traditionally strong exposure to Foundry customers to keep the order strength continuing. Bottom line, this is a "show me" gross margin story and they expect it to unfold.

Notablecalls: Expect to see buy intetrest in MTSN today. The thing with JPM's Focus List is that they keep pressing their bets until they work.

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