New Markets Magnify Microscope Maker's Potential
By Richard Tortoriello
This week's Standard & Poor's Focus Stock of the Week is FEI Co. (FEIC ), which carries S&P's highest investment ranking of 5 STARS (buy.)
Hillsboro, Ore.-based FEI competes in the market for electron beam and ion beam microscopes, used in microelectronics (semiconductors and data storage) and scientific-industrial applications. The company was formed in 1999 through the merger of FEI/Philips Electron Optics division with Micrion Corp.
FEI produces scanning electron microscopes (SEMs), which use focused electron beams for imaging, analysis, and measurement of structures as small as the atomic level; transmission electron microscopes (TEMs), which are widely used to obtain high-resolution images of extremely-small structures; and focused ion beam (FIB) systems, which can make very small cuts or even add material to a surface by combining an ion beam with particular gases.
FEI sells its products to all major semiconductor and data storage manufacturers, as well as a variety of customers in academia, life sciences, and other industries. Average selling prices for its products range from $200,000 to $3.4 million.
The company's roots are in the laboratory market, and in 1998 54% of the company's revenues came from scientific and industrial applications. In 1999, with the realization that semiconductor feature sizes were rapidly shrinking to sub-micron sizes (a micron is a millionth of a meter, or about 1/100 the width of a human hair), it began to focus on expanding the applications of its tools in the microlectronics market.
By combining an electron microscope and an FIB microscope (a tool the company refers to as "an atomic sandblaster") with wafer handling capabilities and software, FEI developed a unique productivity enhancement tool for this large market-and boosted its semiconductor revenues to 56% of total revenues in 2000, from 37% in 1998.
The resulting tool, FEI's DualBeam, provides 3-dimensional views of wafer structures and defects, without the need to break entire wafers. This 3D capability is unique in the industry, and increasingly important in analyzing defects buried beneath a wafer's surface and in measuring the dimensions of semiconductor features with high aspect ratios (the ratio of depth to width), such as new copper plugs.
Another application of the DualBeam tool is wafer biopsy, in which a very small slice is taken out of a wafer for examination in a laboratory. This allows for adjusting semiconductor processes without breaking entire wafers, a very expensive process.
Another driver of sales for FEI is the shift from 200mm (8") to 300mm (12") silicon wafers. This move, currently in its incipient stages, offers significant cost savings to semiconductor manufacturers. However, in order to realize these savings 300mm fabricating facilities will have to quickly improve yields (the number of usable chips per wafer-yields are always low at the beginning stages of a new process). In order to do this, chipmakers will need to carefully measure every aspect of the process, driving the need for metrology equipment such as FEI's.
FEI sees its overall per-fab opportunity in the semiconductor industry as in the range of 8 to 12 machines per fab and estimates that it currently has an average of 3 to 4 machines.
FIBs are also used for photomask repair. Photomasks are clear quartz plates patterned with chrome and used to transfer circuit images onto silicon wafers. FEI's tool can repair very small defects on the mask-removing or adding tiny particles of chrome-at sizes beyond the capabilities of the lasers currently used for this process.
In the data storage industry, FEI's tools are used to measure thin film layers and trim thin film heads. This segment has held up relatively well in the downturn, accounting for about 20% of third quarter sales, vs. 10% in 2000. The company currently has 5 to 6 tools in-line in each of the six thin-film head manufacturers and sees its opportunity as 8 to 14 machines.
Another opportunity for FEI is in the life sciences industry (about 11% of sales). TEMs are being used increasingly in structural biology, including genomics and protein sequencing and analysis. FEI also sells to all major institutes of health, and has seen a significant increase in enquiries for its instruments in the wake of recent bioterrorism attacks.
The company's strategy includes expanding the use of 3D applications in metrology, moving its semiconductor tools from the R&D lab into the fab production line, increasing its penetration of the data storage and life sciences markets, adding strategic partnerships with semiconductor equipment vendors (such as one recently announced with KLA-Tencor), and aggressively pursuing acquisitions of complementary technologies.
Major competitors include Hitachi, JEOL, and Seiko. Although no company yet has a competing 3D product offering, FEI believes that Hitachi has the intellectual property necessary to make an FIB.
We at S&P expect FEI to post revenue growth of 15% this year, and another 15% in 2002. By contrast the semiconductor capital equipment spending as a whole is expected to decline over 40% this year, and we expect another 10% or greater decline in 2002.
We expect earnings per share excluding goodwill amortization of $1.30 in 2001 and $1.47 in 2002, with projected five-year annual growth near 23%. At a recent closing price of $28.50, FEIC trades at approximately 19 times our 2002 EPS estimate, and at a discount to its projected long-term growth rate.
We believe that semiconductor capital equipment spending will start to turn positive in mid-2002 and that FEIC will benefit disproportionately from this spending, due to the demand for equipment capable of finding defects and improving yields at the most advanced process sizes. We project a six to 12 month target price of $40 (about 27 times S&P's 2002 EPS estimate), implying a little more than 40% upside from current prices levels.
Tortoriello is a technology analyst for Standard & Poor's