Semiconductor Equipment - Berenberg Bank

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Applied Materials Inc Technology Hardware Recovery and growth already priced in In our bull-case scenario, we believe AMAT’s SSG revenue will grow at c6.2% from now to 2016, and exceed the 2007 revenue peak by 2016, driven by 1) the strong WFE spending environment (WFE spending is likely to grow from $30bn today to $37bn in 2016 and $40bn in 2017), and 2) a 1% WFE share gain mainly due to a 5% process control potential share gain. Our bull cash 2016 non-GAAP EPS will reach $1.7, which has a CAGR of 23% pa from 2012 to 2016, driven by an opex cut from 25% of revenue in 2012 to 20% by 2016. However, the $1.7 bull-case EPS is 20% lower than AMAT’s bull-case scenario $2.15. Figure 2: 2016 bull-case EPS of $2.15 2016 AMAT bull case Berenberg Bull case Difference WFE $bn 37.0 37.0 - Market share 21.9% 19.0% -3% Revenue 12.4 11.3 -9% SSG 8.1 7.0 -13.6% AGS 2.6 2.6 - Non semi 1.7 1.7 - GM 46.0% 44.0% -2.0% Opex 2.5 2.3 -8.0% Opex% 20.0% 20.0% 0.0% OP% 26.0% 24.0% -2.0% EPS 2.15 1.7 -20.9% Share no mn 1,140 1,140 - Source: Company data AMAT’s 2016 bull-case EPS $2.15 is driven by 1) $37bn in WFE spending, 2) a 4% WFE market share gain from 2012 (up from 18% to 22% of the WFE market), 3) $1bn in Display revenue (equating to a 5% market share gain, and 3) costcutting in the material costs area and lower opex/revenue from 25% of revenue today to 20%, 4) a tax rate decrease of 2-3% to 22%. The $2.15 EPS suggests a fair value of $20.8 by end-2014 using our 12x P/E and discounted using 11.4% WACC. AMAT laid out similar market share expansion/revenue targets previously, but did not achieve all of them. In 2012, it aimed to gain market share in the etching and inspection markets. As per Gartner data, its market share in etching was down 2% from 2011 to 2012. In 2010, it aimed to gain 4% share in etching and 3% share in inspection. As per Gartner data, its etching market share increased only 2% from 2009 to 2010, and its wafer inspection market share was only up 1%. In our opinion, the new president and CFO, both of whom had good executing track records, may put AMAT in a better position to achieve targets: however, we think a 2-4% gain is a stretch. 96
Applied Materials Inc Technology Hardware We remain cautious about the likelihood of a 2-4% share gain AMAT is aiming to gain a 2-4% WFE market share by 2016, specifically in etching and process control. As per Figure 3, the 2-4% share gain is an important element of AMAT’s bull-case 2016 projection, and accounts for 28% of peak $2.15 EPS. Compared to a flat market share, the extra 2% and 4% share gain would contribute a 7% and 10% EPS CAGR respectively. Figure 3: 4% share gain contributes 27% $2.15 EPS AMAT projection Berenberg 2012 0% 2% vs 4% vs 1% vs 2016 share gain share gain 0% share gain share gain 0% share gain share gain 4% share gain Share gain 0% 2% 4% 1% -3% % of WFE 18% 18% 20% 22% 19% -3% WFE $bn 29.7 37 37 37 37 SSG revenue $bn 5.5 6.7 7.4 11% 8.1 22% 7.0 -13% Other $bn 3.2 4.3 4.3 4.3 4.3 8.7 11.0 11.7 7% 12.4 13% 11.33 -9% GM % 40.9% 45% 46% 1% 46% 1% 44% -2% Opex % 25.0% 20% 20% 0% 20% 0% 20% 20% Opex $bn 2.2 2.2 2.3 7% 2.5 13% 2.3 -9% Op% 15.9% 25% 26% 1% 26% 1% 24% -2% Op profit $bn 1.4 2.7 3.0 11% 3.2 18% 2.7 -16% tax rate % 26% 22% 22% 0% 22% 0% 22% 0% EPS $ 0.75 1.55 1.95 26.1% 2.15 39% 1.70 -20.9% EPS CAGRvs 2012 20% 27% 30% 23% No. shares mn 1,275 1,140 1,140 1,140 1,140 Source: Company data, Berenberg estimates In our opinion, AMAT will gain a 1% WFE share by 2016/2017, but it would be challenging to gain a 2-4% share as: 1) from 2004 to 2012, AMAT’s share in WFE was between 15-20% (Gartner data), and it has never before gained more than a 1.1% share within any threeyear timeframe; 2) AMAT only addresses 72% of the WFE market (Gartner data), so to gain a further 2-4% share of the total market, it would need to gain by 3-6% from its current customer base. We consider this to be a challenging target as the market is highly consolidated and AMAT’s competitors are all also trying to expand/maintain market share; 3) it may gain 1% share in etching market as silicon etching market expansion, which is less than 1% WFE share; 4) it may gain a maximum 5% market share in process control, which is a 1% WFE share, as the process control market is 16% of WFE spending at peak; 5) we do not think AMAT will gain a 4% market share through acquisition in the etching or process control markets. Etching – we expect AMAT to gain a 1% share The etching market is dominated by LAM, which has a 47% market share. According to Gartner’s forecast, the etching market will remain about flat between 2012 and 2016: although silicon and metal etching will grow, dielectric etching is a segment in decline. By our calculations (see Figure 4), AMAT can achieve a 1% etching market share 97
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