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Tuesday, January 13, 1998
Cymer, Inc.
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Phone: 619-451-7143
Website: http://www.cymer.com
Price (1/12/98): $15
HOW DID IT FIND TROUBLE?
Until September, Cymer was the kind of runaway success story investors fantasize about when they think of advanced laser technology. After going public at a split-adjusted $4 3/4 just a year earlier, the stock had beamed in on a ten-bagger, hitting an all-time high of $49 1/4 by late August after beating second quarter earnings estimates by 50%.
Sales were lighting up because Cymer was virtually the only company providing the kind of lasers needed by semiconductor manufacturers to produce the newest generation of chips. Revenues grew from $18.8 million in 1995, to $65 million in 1996, to $87 million for the first six months of 1997.
Then came trouble. In early September, the stock dropped to $41 a share after the company cancelled an appearance at a semiconductor equipment conference, inciting rumors that it would miss its third quarter numbers. The company's CFO William Angus said the company had to make "some adjustments in [its] operating plans for the remainder of the quarter" and that this development created "more risk." One customer had apparently postponed delivery of some lasers.
Some speculated that the ramp up of Cymer's new 0.25 micron lasers wasn't going smoothly. The share price continued to deteriorate, with analyst Brett Hodess of Cymer underwriter Montgomery Securities worrying in late September that technical problems at Cymer's major customers Nikon and Canon could force laser orders to be pushed back. Days later, fellow underwriter Morgan Stanley Dean Witter also threw in the towel, cutting its rating from "strong buy" to "neutral" and dropping the shares another $4 to $26.
Then on October 24, Cymer delivered an apparent response to its skeptics: third quarter revenue had tripled to $57.5 million, good for earnings of $0.23 per share, which beat estimates calling for $0.21.
CEO Robert Akins also issued a reassuring short-term forecast. "Based on our Sept. 30, 1997 backlog and significant orders received since the close of the third quarter, and on customer forecasts, we currently expect continued sequential revenue growth for at least the next two quarters." The shares shot up over $3 to $29 1/2.
But the same day, UBS Securities analyst Mark FitzGerald downgraded several semiconductor equipment stocks. The following week, the market collapsed due to the Asian economic crisis. Cymer fell to around $22, and then sank farther as conditions worsened and investors saw the firm's huge exposure to Japan (60% of sales) as cause for additional concern. By year-end, Cymer was trading around $15.
BUSINESS DESCRIPTION
Based in San Diego, Cymer is the leading manufacturer of excimer lasers for use in deep ultraviolet (DUV) photolithography systems.
Photolithography is an essential step in the fabrication of semiconductor wafers and accounts for about a third of the costs associated with chip production. The laser used in these systems penetrates a photomask and burns a pattern onto the silicon. To get more bang for their silicon buck, chipmakers want to cram more circuits on a chip. To do so, they need lasers that can burn in very fine circuits.
Cymer's most advanced lasers produce DUV light at a wavelength of 0.25 microns (one-millionth of a meter), perfect for the emerging generation of chips. It sells nearly all of its lasers to four customers: ASM Lithography <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASMLF)") else Response.Write("(Nasdaq: ASMLF)") end if %>, Silicon Valley Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SVGI)") else Response.Write("(Nasdaq: SVGI)") end if %>, Canon, and Nikon. Though 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 similar lasers, Cymer dominates its niche with (by some accounts) up to 90% of the world market.
Insiders own 13.8% of the stock. The company issued $172.5 million in convertible notes on August 6. The stock split 2-for-1 on August 21.
FINANCIAL FACTS
Income Statement
12-month sales: $172.1 million
12-month income: $22.4 million
12-month EPS: $0.75
Profit Margin: 13%
Market Cap: $457.5 million
Balance Sheet
Cash & Securities: $167.1 million
Current Assets: $304.7 million
Current Liabilities: $81.6 million
Long-term Debt: $175.5 million
Ratios
Price-to-earnings: 20
Price-to-sales: 2.7
HOW COULD YOU HAVE SEEN IT COMING?
As of late August, analysts were calling for Cymer to earn $1.15 a share for FY98. At its peak, then, Cymer traded at 42.8 times earnings estimates six quarters out -- pricey even for a company delivering exceptional growth.
A success story like Cymer incites the kind of investor enthusiasm that leaves no margin for error. Yet in a huge ramp up for a major new product, even experienced manufacturers can experience delays and setbacks. Cymer's lasers had some vibration problems. The company was forced to take reserves to fix the problem, which it did.
Ramp ups can create other problems, too. Once customers know a supplier can meet demand, they will stop over-ordering to ensure supply. So the early stage growth rate for a new product can lead investors to false assumptions about future growth.
Moreover, though some argue that chipmakers can't afford not to keep up with the latest technology, semiconductor capital equipment firms remain generally dependent on demand for semiconductors. Both businesses remain notoriously cyclical. Investors who saw general trouble brewing in the growing Asian financial crisis might have taken that as another reason to fear bull market valuations in this volatile sector.
WHERE TO FROM HERE?
In its third quarter, Cymer sold 124 lasers for use in photolithography applications and reported a 12-month rolling backlog for orders totaling $116.3 million, down from $122.8 million at the end of the June quarter.
After an expansion of its San Diego facilities and new additions at Seiko, its contract manufacturing partner in Japan, Cymer now has the capacity to produce more than 1,000 excimer lasers a year. That's more than enough to meet worldwide demand. CEO Akins expects Cymer will sell around 600 lasers in 1998.
Yet the Asian crisis has already caused turmoil among the chipmakers, as an expected economic slowdown sets in and some determine that they must find new partners to finance capital expenditures, or push out planned spending. Though the semiconductor industry should broadly adopt DUV lithography at some point, Cymer unit sales could really be hurt by a slower evolution to the next generation chips.
Cymer should also see increased competition from Komatsu and Lambda-Physik. Cymer's customers are working with its competitors' lasers as part of a sensible move to nail down a second supplier. Having Seiko as a partner, though, could help Cymer maintain a strong position in Japan while cushioning any currency worries. On the other hand, Komatsu plans to fight Cymer by possibly suing Seiko for patent infringement. Cymer thinks the case has no merit.
First Call consensus EPS estimates stand at $0.83 for FY97 and $1.03 for FY98. Cymer now trades at 16 times the current low estimate of $0.95 per share for FY98, which itself assumes 19.5% growth over the next five quarters. It is also a discount to the estimated industry growth rate of 18%, which itself may be low.
As recently as November 12, CEO Akins, responding to an article in Barron's, said, "[W]e are comfortable with market estimates published by Dataquest and end-user demand estimates by VLSI, which indicate a 30-40% long-term growth rate for the DUV photolithography market."
Now that it's dropped 69% off its high, Cymer would appear to have little downside risk, assuming it can at least meet these estimates. That may be a big assumption given the continuing shock waves from the Asian crisis. Still, investors with the vision to make sense of this volatile industry will be taking a close look at Cymer's fourth quarter results and forward expectations. Earnings will be announced January 29.
-- Louis Corrigan
([email protected])
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