Semiconductor Capital
SCE industry outlook getting
stormier
Steve O'Rourke
Research Analyst
(1) 212 250 8670
stephen.orourke@db.com
Hari Polavarapu
Research Analyst
(1) 212 250 2076
hari.chandra@db.com
Peter Kim
Research Analyst
(1) 415 617 4246
peter-d.kim@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Research Product Committee has deemed
this work F.I.T.T. for investors seeing differentiated ideas. Here we present our
semiconductor capital equipment (SCE) industry outlook through 2009, assessing
semiconductor industry spending patterns and implications on the SCE industry
into 2010. We extend our cycle view to our SCE coverage companies accounting
for company-specific cycle to cycle changes.
Deutsche Bank Securities Inc.
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factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Companies featured
Applied Materials (AMAT.OQ),USD10.67 Hold
2008A 2009E 2010E
EPS (USD) 0.78 0.06 –
P/E (x) 23.1 156.0 –
EV/EBITDA (x) 11.5 27.9 –
KLA - Tencor (KLAC.OQ),USD22.40 Hold
2008A 2009E 2010E
EPS (USD) 2.73 0.25 –
P/E (x) 17.7 39.4 –
EV/EBITDA (x) 10.1 3.8 –
Lam Research (LRCX.OQ),USD21.99 Hold
2008A 2009E 2010E
EPS (USD) 3.49 -0.02 –
P/E (x) 13.1 – –
EV/EBITDA (x) 7.6 5.9 –
Novellus Systems (NVLS.OQ),USD12.70 Sell
2007A 2008E 2009E
EPS (USD) 1.66 0.07 -0.56
P/E (x) 17.8 147.8 –
EV/EBITDA (x) 9.1 4.6 –
Varian Semiconductor (VSEA.OQ),USD18.03 Hold
2008A 2009E 2010E
EPS (USD) 1.34 -0.33 –
P/E (x) 26.3 – –
EV/EBITDA (x) 13.5 – –
Mattson Technology (MTSN.OQ),USD1.32 Hold
2007A 2008E 2009E
EPS (USD) 0.52 -1.05 -1.25
P/E (x) 18.2 – –
EV/EBITDA (x) 10.4 – –
Rudolph Technologies (RTEC.OQ),USD3.54 Hold
2007A 2008E 2009E
EPS (USD) 0.44 -0.19 -0.60
P/E (x) 34.1 – –
EV/EBITDA (x) 12.9 22.9 –
Related recent research Date
Market positioning, share gains, and the next upturn
Stephen O'Rourke
12 Aug 2008
2008 CapEx projection and industry outlook
Stephen O'Rourke
4 Dec 2007
Cycle view through 2008: a digestion period is
overdue Stephen O'Rourke
23 Apr 2007
Fundamental: we assess semiconductor capital equipment industry cycles
We expect the present SCE industry downturn to continue through 2009, rivaling
the worst of past downturns. We see virtually no potential for a material SCE
bookings recovery in 2009, and expect only a tepid pick-up in 2010, if there is one
at all. We believe the magnitude (i.e. peak to trough decline) of the present SCE
industry downturn can now be fairly well assessed; however, we believe duration
is yet to be fully quantified and discounted. We anticipate fundamentals could
indeed bottom by mid-2009, but do not expect a pick-up in 2H09. We believe the
cyclical trough could extend into 2010.
Industry: we forecast 2009 semiconductor CapEx to be down another ~37%
We are forecasting 2009 semiconductor industry CapEx of ~$26B, down ~37%
y/y, and down ~57% from the cycle peak of 2007. Despite sharp cuts to CapEx
forecasts, we maintain a negative bias to 2009 spending. We expect the ongoing
memory overcapacity will be exacerbated by a deteriorating macroeconomic
environment in 2009, leading to virtually no spending on new production capacity,
and only moderate spending on technology upgrades (i.e. shrinks).
Thematic: a more efficient industry cannot escape the cyclical storm
Despite a much more efficient SCE industry, we are forecasting losses to return to
many SCE industry companies in 2009, with some industry stalwarts struggling to
maintain breakeven. We have adjusted our 2009 estimates to be consistent with
our cycle view, and believe 2009 consensus estimates are still too high; we
anticipate downward revisions of consensus estimates in the coming months. We
(DB) are forecasting an aggregate y/y revenue decline in 2009 among coverage
SCE companies of ~35% versus a consensus decline of ~26%.
Thought-Leading: the near-term versus the long-term, and stocks
SCE stocks are trading near multi-year lows, but we believe recent lows could be
retested in the near-term as the full magnitude and duration of the present
downturn are discounted. We remain cautious on industry fundamentals as well as
stocks, and believe stock entry points now are largely a function of time horizons
(e.g. long term oriented investors could begin to build positions in some stocks
regardless of modest potential downside over the near term), with stock
valuations of ~1.0x to ~2.0x TBV marking a reasonable trough valuation range
depending on the quality of the company. Despite clearly deteriorating
fundamentals over the coming year we believe the present downturn will offer
opportunities to build positions in SCE company stocks over the coming quarters.

Table of Contents
Investment thesis .............................................................................. 3
Downturn to extend through 2009; no relief in the near term ..................................................3
Coverage company changes.....................................................................................................4
Valuation ..................................................................................................................................4
Risks ........................................................................................................................................4
Macroeconomic backdrop ................................................................ 5
Deutsche Bank’s macroeconomic outlook................................................................................5
Conclusions..............................................................................................................................7
SCE industry outlook ........................................................................ 9
2009 semiconductor capital spending to be down ~37% y/y...................................................9
A very modest recovery in 2010, or possibly later ..................................................................10
2009 CapEx forecast ........................................................................ 13
Top 25 CapEx spenders ..........................................................................................................13
CapEx by segment..................................................................................................................14
CapEx by region......................................................................................................................15
Capacity and utilization .................................................................. 17
Chip sales, production capacity, and utilization.......................................................................17
Utilization and the SOXX index................................................................................................18
SCE Bookings and the SOXX index.........................................................................................19
Memory – more pain to come ........................................................ 21
Industry now paying for reckless memory spending ..............................................................21
A closer look at DRAM pricing and units ................................................................................24
A closer look at NAND pricing and units .................................................................................25
Chip sales by segment (other than memory) ..........................................................................26
SCE industry outlook ...................................................................... 27
SCE companies – 2009 estimates still have downside risk.....................................................27
The relationship between CapEx and SCE revenue ................................................................28
Bookings nearing decade long lows, but may decline further ................................................29
SCE companies and stocks............................................................. 30
Valuation ................................................................................................................................30
Downside has not fully played out yet ....................................................................................30
Specific company assessments..............................................................................................31
Applied Materials (AMAT, Hold rating, $8.50 price target)......................................................32
KLA-Tencor (KLAC, Hold rating, $19 price target) ...................................................................38
Lam Research (LRCX, Hold rating, $18 price target)...............................................................43
Novellus Systems (NVLS, Sell rating, $10.00 price target)......................................................48
Varian Semiconductor (VSEA, Hold rating, $15 price target)...................................................52
Mattson Technology (MTSN, Hold rating, $2 price target)......................................................57
Rudolph Technologies (RTEC, Hold rating, $5 price target) ....................................................61
Companies mentioned............................................................................................................65