Foolish Feature, 02/11/98: Stocks Fools Love, Cymer, by Louis Corrigan

Stocks Fools Love
February 11, 1998

Cymer
by Louis Corrigan (TMF Seymor)

Cymer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYMI)") else Response.Write("(Nasdaq: CYMI)") end if %>
6750 Via Del Campo Court
San Diego, CA 92127
http://www.cymer.com
$19 7/8 as of February 9, 1998

The experts say investors should never fall in love with a stock. But hey, what Fools we mortals be! Yet rather than let our propensity for passion be ruled by mere propinquity, it's proper to pinpoint a business worth loving before playing kissy-face with its stock. I love a business with a striking and understandable appeal but also enough mystery to be full of creative surprises; one protected by a moat so my fair lovely can't be harmed by hoodlums though she be as powerful as Xena; one with profit margins as tasty as fingers wet with honeydew; one with a little cash to get us through tough times or, at least, not too much debt to weigh us down; and finally, one capable of drama. Fair Cymer meeteth my desires.

Cymer is the leading manufacturer of excimer lasers used in deep ultraviolet (DUV) photolithography systems. That's a cold and obscure-sounding business until you understand that photolithography is a crucial step in the fabrication of semiconductor wafers, accounting for a third of the costs of chipmaking. With chipmakers looking to cram more circuits on a chip, get more chips on a wafer, and do it all faster and better so they can make more money, there's demand for ever more refined lasers. Cymer's lasers are cutting edge, producing DUV light at a wavelength of 0.25 microns (one-millionth of a meter). They are currently sold to the four leading makers of lithography equipment: Nikon makes up 39% of Cymer's sales, Canon 25%, ASM Lithography <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASMLF)") else Response.Write("(Nasdaq: ASMLF)") end if %> 24%, and Silicon Valley Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SVGI)") else Response.Write("(Nasdaq: SVGI)") end if %> 6%.

Cymer not only has an astonishing 80% share of the DUV market, but also has basically created the roadmap being followed by the laser integrators and these companies' chipmaking customers. The Japanese firm Komatsu and Germany-based Lambda-Physik, a unit of Coherent Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COHR)") else Response.Write("(Nasdaq: COHR)") end if %>, have sold similar lasers for testing, but none is yet being used in actual production. In other words, Cymer has a significant lead in a crucial niche of the information economy. Plus, with a suite of more advanced lasers being introduced over the next nine months and strong customer service, Cymer promises to make its current moat a little wider.

Last year, Cymer's net income rose 300% to $26 million, or $0.86 a share, on a 213% jump in sales to $204 million. It also reported delicious 12.8% profit margins. Asia-related troubles and excess supply in the DRAM market have definitely hit the semiconductor equipment business. Cymer expects first quarter sales to drop 10% to 15% below fourth quarter levels. Even so, the company intends to continue spending on research and development (12% of revenue in 1997) and on beefing up manufacturing and service. So first quarter earnings per share will fall to around $0.09 to $0.14 per share, down from $0.24 last quarter. With poor near-term visibility, FY98 results seem destined to be well below last year's.

Since lithography firms take 18 months to fill orders, though, chipmakers aren't canceling them. Plus, industry troubles usually lead chipmakers to move more quickly to the latest technology, and Cymer is it. The firm's forthcoming products should be even more profitable than its current lasers. The company also expects higher-margin service and spare parts revenues to climb this year from 8% of revenues to 15%, thanks to 460 lasers sold last year versus 145 in 1996. Fair Cymer also has saved nearly all of the $173 million it borrowed last summer. Its board recently said the stock was "an attractive value" at the then current price of $15, and the firm may use up to $50 million of its cash to buy back shares. That, along with a broad tech recovery, has helped spark the recent rally in Cymer shares.

As for drama, just look at a chart of this stock. Investors may have gotten a bit carried away last summer, but their excitement wasn't misplaced, just overdone. Cymer seems to me to be one of the best-positioned companies in a nuts-and-bolts arena of the new economy. Management has delivered the goods according to plan and seems determined to continue doing so. Since insiders own 14% of the shares, they have some incentive. Given the near-term uncertainties and the cyclicality of the semi equipment market, PEGs and YPEGs aren't much use. But with analysts expecting the DUV lithography market to grow by 28% annually through 2000 and Cymer still the dominant supplier to that market, it's not hard to imagine that an investor buying these shares around $20 could see this stock double in the next two years.

Next Stock Fools Love: Estee Lauder

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