Morningstar | Tokyo Electron's 2019 Outlook Mimics Peers as Memory Spending Slows; Shares Undervalued
Tokyo Electron reported fiscal third-quarter results consistent with our expectations, while reiterating its fiscal 2019 revenue growth forecast of 13%. During last quarter’s results, management had revised this full-year growth rate down from 24% due to slowing NAND equipment demand. For calendar 2019, wafer fab equipment spending is expected to be down 15% to 20% as memory weakness persists along with U.S.-China trade tensions. We note this outlook is consistent with our model as well as fellow-etch supplier Lam Research. All in, our positive thesis for narrow-moat Tokyo Electron and close peers Lam Research and Applied Materials remains intact, and we think shares look attractive relative to our unchanged fair value estimate of JPY 18,500.Third-quarter revenue was down 32% sequentially to 268.2 billion yen. Each major equipment end-market (DRAM, NAND, logic, and foundry) fell from the prior quarter, with logic and foundry lower by more than 50% each and DRAM down 44%. Tokyo Electron’s gross margins were sequentially flat at 40.9% as lower volumes were offset by a more favorable product mix. Management expects sales for fiscal 2019 to be 1,280 billion yen, which implies 13% growth over fiscal 2018. For the fiscal fourth quarter, management foresees a sequential rebound in logic, foundry, and DRAM, partially offset by lower NAND equipment sales.
For calendar 2019, management projects combined logic and foundry WFE growth of 25% with 10-nanometer and beyond spending to comprise of roughly half of total equipment purchases. We expect Tokyo Electron to benefit from greater multiple patterning opportunities for its etch and deposition tools within this end-market. Meanwhile, DRAM and NAND WFE is projected to be lower 30% and 50%, respectively, in 2019. Beyond 2019 we anticipate a rebound in memory spending aligned with continued transitions to 1Z-nm DRAM and 128-layer 3D NAND.
For more information on our thoughts on the WFE space in 2019 and beyond, please see our recent Technology Select Presentation, “Buy the Chip Equip Dip.â€
Tokyo Electron is a supplier of semiconductor production equipment ("SPE") and flat panel display ("FPD") selling through global network that spans Japan, the U.S., Europe and Asia. Co.'s principal products are coater/developers, plasma etch systems, thermal processing systems, single wafer deposition systems, cleaning systems (auto wet station, single wafer cleaning system, pre-clean system and scrubber system), wafer prober, FPD coater/developers and FPD plasma etch/ash systems. In addition, Co., through its subsidiaries, is engaged in the provision of transportation services, insurance services, as well as the support services for Co.'s photovoltaic cell ("PV") production equipment.
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