By Colin McArdle We recently upgraded our recommendation on Brooks Automation (BRKS
; recent price: $15) to strong buy, from buy, based upon what we consider to be its undervalued shares relative to peers, as well as a strong market position with broad product offerings. We think the company's proposed $450 million acquisition of Helix Technology (HELX
; $18) would further diversify Brooks' product lines while adding additional economies of scale in manufacturing and distribution.
Brooks Automation is the leading supplier of semiconductor tool and factory equipment, and software automation. The company has particular expertise in the areas of cluster-tool vacuum-processing environments and integrated factory-automation software. Over the years, Brooks' product line has expanded considerably, from individual robots used to transfer semiconductor wafers to fully integrated tool and software solutions to control the flow of resources through a factory.
BIG REVENUE CONTRIBUTOR. Brooks boosted its portfolio with the May, 2002, acquisition of PRI Automation (PRI) via an exchange of stock valued at $536 million. The deal added factory transport and atmospheric tools, where Brooks' offerings were weak or nonexistent. Factory transport systems, or automated material-handling systems (AMHS), are used to automatically move wafers around a factory floor.
More than half of Brooks' revenues come from tool-automation systems (59% of fiscal year 2004 revenues), which provide makers of semiconductor gear with standard automation features to add to their tools. Major product lines include atmospheric and vacuum robots and modules, integrated vacuum and atmospheric automation systems, and LCD systems (for flat-panel display manufacturing).
Factory hardware systems (18% of fiscal 2004 revenues) provide an interface between the factory floor and manufacturing equipment. Products include SMIF and FOUP load ports, used to load wafer cassettes into a tool; integrated front ends, which provide the interface between a tool and the factory floor; and mini-environments, wafer and reticle sorters, and test wafer and reticle stockers. Factory hardware also includes 200mm and 300mm AMHS systems, added through the acquisition of PRI.
GLOBAL CLIENTELE. Factory-automation software (22% of fiscal 2004 revenues) ranges from manufacturing execution systems (MES), which manage the operations of an entire fab (fabrication), and logistics software for scheduling and coordinating workflow, to individual software packages designed to meet specific requirements, such as preventive maintenance systems for equipment.
Brooks' 20 largest customers accounted for 50% of fiscal 2004 revenues. In fiscal 2003, the top 10 customers accounted for 37% of total revenue.
The company serves a global marketplace, with 51% of revenue in fiscal 2004 coming from the U.S. (50% in fiscal 2003), 26% from Asia Pacific (31%), and 22% from Europe (19%). It has a direct-sales and marketing organization across North America, Asia, and Europe. Backlog at the end of fiscal 2004 stood at $157.7 million, vs. $112.7 million at the end of fiscal 2003.
HEAVYWEIGHT AMAT. We believe Brooks as a stand-alone company benefits from the transition to 300mm wafer sizes, a trend that is continuing at a faster-than-expected pace. As much as 80% of equipment revenue in fiscal year 2006 is likely to be related to 300mm manufacturing. In addition, Brooks derives a substantial portion of revenue, as much as 20%, we believe, from software sales to customers both within and outside the semiconductor-equipment industry, further mitigating risk, in our view.
The proposed Helix acquisition would add a company whose sales rose 51% in 2004, reflecting improved demand for its cryogenic vacuum pumps, vacuum-measurement components, and support services. Helix Technology makes a broad range of vacuum components and subsystems used by electronic component manufacturers serving the semiconductor, data-storage, and flat-panel display markets.
Helix' vacuum systems provide enabling technology for several key steps within the chip-manufacturing process, including ion implantation, physical vapor deposition, chemical vapor deposition, and etching. Applied Materials (AMAT
; ranked buy; $18), the world's leading semiconductor-equipment company, accounted for 28% of net sales in 2004 and 20% in 2003.
IMPROVING FIGURES. We see a number of synergistic opportunities from the Helix deal, including facilities rationalization, manufacturing efficiencies, cross-selling opportunities, and other general economies-of-scale cost savings. We believe these synergies could amount to as much as $25 million in annual cost savings for the combined company.
In general, we see semiconductor-equipment demand rebounding during the second half of 2005, as indicated by comments from leading chip-equipment manufacturers about recent order increases due to modestly expanding capital-spending budgets. In our opinion, the buildup of inventories during 2004 was reduced during the first half of this year.
We see overall sales growth for the group of 5%, with slightly higher growth rates for technology leaders in the front end of the manufacturing process, as we think customers need to invest more to transition to smaller nodes in the future.
The S&P Semiconductor Equipment Index increased 4.2% year to date through Aug. 5, vs. a gain of 1.8% for the S&P 1500. In the three months through June, 2005, the North American semiconductor-equipment industry's preliminary book-to-bill ratio was 0.93, a significant increase from May's 0.80 and an increase from the February bottom reading of 0.77. This reflects, we believe, the ongoing chip inventory correction. In the last six months of 2004, the ratio was consistently around 1.0, which implied limited growth, in our opinion, and we envision that level returning this quarter.
RISKS EXIST. From a geographic standpoint, Asia continues to be a major source of both semiconductor and semiconductor-equipment sales in this cycle. This region, including Japan and Taiwan, accounts for as much as 70% of sales of some of the larger companies that we follow. As a result, we tend to favor companies with scale that can support worldwide distribution. We believe that the high and volatile price of oil, particularly in emerging markets, could stifle a recovery in demand for semiconductor equipment.
Our 12-month target price of $22 for Brooks shares is derived by applying what we believe is a conservative peer-group-based price-to-sales multiple of 2.2 to our fiscal year 2006 (September) sales-per-share estimate. It also represents a p-e multiple of 55 times our fiscal year 2006 earnings-per-share estimate of 40 cents.
Risks to our recommendation and target price include pricing pressure and customer concentration. We also think Brooks could face increased competition from larger companies with greater economies of scale. In addition, deferrals of new fab production, due to higher interest rates and weak end-demand for chips, would have a detrimental impact on demand for factory equipment.
In the U.S.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations, and 12.3% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations, and 18.8% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations, and 19.5% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations, and 13.6% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index, in Asia the S&P Asia 50 Index, and in Malaysia the KLCI or KL Emas Index.
For All Regions:
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Additional information is available upon request.
This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; in Sweden by Standard & Poor's AB ("S&P AB"), in Malaysia by Standard & Poor's Malaysia Sdn Bhd ("S&PM") which is regulated by the Securities Commission and in Australia by Standard & Poor's Information Services (Australia) Pty Ltd ("SPIS") which is regulated by the Australian Securities & Investments Commission.
The research and analytical services performed by SPIAS, S&P LLC, S&P AB, S&PM and SPIS are each conducted separately from any other analytical activity of Standard & Poor's.
S&P and/or one of its affiliates has performed services for and received compensation from BRKS, HELX and AMAT during the past 12 months.
This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. Analyst McArdle follows semiconductor equipment stocks for Standard & Poor's Equity Research