InformationWeek

November 17, 1997

Taking Stock: Laser Demand Drives Cym er

Maker of excimer-laser systems stands to benefit in semiconductor equipment market--unless it gets complacent

he recent decline in Asian stock markets and commensurate concerns over the region's emerging economies have led to a major sell-off in semiconductor equipment and related stocks in the United States. There may be some legitimate concerns over fall-off of equipment orders, but much of the hysteria has been overblown. The resurgence in the semiconductor equip- ment market this year has not only been driven by equipment orders, but also by new capacity demand and retrofits of existing technologies.

All told, growth in the semiconductor equipment market this year is projected to be between 10% a nd 15%.

One semiconductor-related company worth watching in all the post-stock-drop shuffling is Cymer Inc., the only commercial manufacturer of the excimer-laser systems. These products are used in the deep ultraviolet (DUV) photolithography portion of semiconductor production. DUV photolithography systems-and, subsequently, the excimer-laser systems that Cymer produces-should be in high demand, given the current trend toward production of semiconductors below 0.35 microns.

Semiconductor manufacturers need DUV's shorter wavelengths of light in order to achieve critical features on smaller chip geometries. The process requires that the light source have very high performance characteristics, such as high pulse repetition and narrow bandwidth. Prior-generation "stepper" technology required high-powered lamps-and many vendors supplied them. Today, however, laser systems are used to produce features down to 0.10 micron, and San Diego-based Cymer controls 80% of the market.

In order to meet the expected in crease in demand, Cymer has added a new manufacturing facility, also in San Diego. The company expects an annual capacity of up to 1,000 lasers, selling for an average of around $400,000 apiece. Sales for 1998 are projected to be just over 500 units.

In the short term, Cymer may suffer a few hiccups and deal with some issues that may be beyond its control. For example, end users-such as DUV photolithography system manufacturers Canon and Nikon-are suffering manufacturing problems. Any delays in manufacturing and delivering steppers will potentially result in deferral of new laser orders.

Also, given the leading-edge nature of Cymer's technology, it would not be surprising to see the emergence of some periodic manufacturing issues related to the new facility. And, like most technology companies, one of the biggest issues Cymer faces is hiring and training qualified personnel, especially for the new plant.

Trouble Ahead?
Despite its current comfortable market position, Cymer can't afford to get too complacent. Komatsu and Coherent, both well-financed and larger than Cymer, are testing competitive products and are ramping up their production capabilities. Also, newer technologies are always just around the corner. From an investor's standpoint, it doesn't help that many momentum traders move in and out of the stock frequently and are likely to continue causing share-price volatility.

Cymer is likely to earn 84 cents per share in 1997 and $1.05 per share in 1998. This is a dramatic increase from the 28 cents per share earned in 1996. The share price reached a high of $49 before tumbling below $20.

Cymer's earnings per share can continue to grow in excess of 25% over the next few years with the benefit of margin expansion, as the company benefits from a lower cost and more efficient manufacturing process. I see a 12- to 18-month price target of $30.

While prospects for Cymer seem promising, this stock may not be for the faint of heart. As with most cutting-edge companies, Cymer's growth potential is somewhat overshadowed by the probablitity of future price volatility.

William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 list. Reach him at bschaff@bayisle.com .

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