Report Card: Gunnar Miller

Gunnar Miller Goldman Sachs
	Report Card 1* Overall rank 1* Rank by institutions 11* Rank by stock picking Makes money for me Saves me from disaster Makes me think Tells the truth Meaningful service, not overkill Well-connected *Out of 20. Best star rating is 3 stars. Click here for our methodology.
1st Place Semiconductor Equipment

Bio

B.A., Lehigh University. Miller has tracked the semiconductor capital equipment sector at Goldman Sachs since 1998. Before that, Miller held a similar position at PaineWebber, which he joined when that firm merged with Kidder Peabody in 1994. He began at Kidder in 1993.

Industry Outlook and Style

The Winners

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"If you have a nine- to 12-month time horizon, start nibbling on these stocks now," suggests Miller. "It's not going to take much to get the market excited, even against the backdrop of poor fundamentals. You have to be willing to look through the current environment."

But beware the near-term risks, cautions the Goldman Sachs analyst. "Over the next three to six months," he says, "the industry will continue to experience significant inventory depletion and will be wrestling with balancing capacity additions with softer-than-expected end demand."

As a result, earnings cuts are far from being over, according to Miller. "With orders down 10% sequentially in the fourth and first quarters, and probably down for all of 2001, earnings estimates could be chopped by as much as 50%."

On the positive side, Miller thinks much of this bad news has already been anticipated and thus is priced into the stocks, which, as a group, sold off sharply in the latter half of 2000.

He also takes hope from the Federal Reserve's two rate cuts January. The Fed's surprise cut on Jan. 3 caused the equipment stocks to take off, if only for a limited period, he notes. "If investors see that these rate cuts and continued cuts presage an increase in consumer spending, then it's more plausible that equipment order rates could reaccelerate in the back half of 2001," he reasons. "They're thinking, 'OK, maybe we won't have a deep recession after all, and if we don't, then electronics demand and, by extension, semiconductor demand, will not worsen -- and could even improve -- throughout the year.' "

Miller is steering risk-tolerant clients toward four names with lower price-to-earnings multiples than their peers -- Lam Research (LRCX Quote), Advanced Energy Industries (AEIS Quote), Axcelis Technologies (ACLS Quote) and Credence Systems (CMOS Quote). His rationale is that if earnings and revenue numbers are cut in the next two quarters, the downside will be more limited with the lower-multiple stocks. (In November 1999, Goldman did an equity underwriting for Advanced, and the firm also has an investment banking relationship with Axcelis.)

"But if you want to branch out into high-quality companies in this industry that are on the Goldman recommended buy list, then you'll buy ASM Lithography (ASML Quote), Applied Materials (AMAT Quote) and Teradyne (TER Quote)," he adds.

The Goldman analyst's No. 1 stock is Lam, which he calls "a management-turnaround story, a new-product story and an attractive-valuation story." Having already made hefty earnings cuts on Lam (his current EPS figures are $1.90 for fiscal year 2001 and $1.55 for fiscal year 2002), Miller contends that its stock could rise to as high as $40 in the next 12 months.

Close on the heels of that pick is Advanced Energy Industries, a diversified company that, among other things, provides power subcomponents to three semiconductor equipment makers -- Applied Materials, Lam and Novellus (NVLS Quote). Miller calls Advanced Energy "a relatively cheap stock" that has the potential to rise to $55.

The stock of Axcelis is primed to climb, he believes. Being the only full-line producer of ion implant equipment, including the fast-growing high-energy ion implant segment, Axcelis could reach $22 in a year, he contends.

As for Credence, it makes test equipment that focuses on the low-end and midrange part of the communications and flash-memory test markets. It has increased its share of the non-DRAM test market from 8% to 13% in the past year. When Miller picked up coverage of Credence with a buy rating in late November, it was at $17; it has since risen substantially. Miller forecasts that the stock is on its way to $35.

Stock Pick

Favorite stock for next 12 months: Lam Research
12-month target price: $35
Comment:
"Lam appears better positioned to endure an industry downturn today, as compared with back in 1998, for three reasons. First, operating profits are running 22%, compared with 2% at the beginning of 1998. Second, it has a significantly stronger backlog now. Third, the product portfolio has improved. Its new products include an etcher called Exlan and a new chemical mechanical planarization system dubbed Teres. We think the strength of Lam's management team is evident in the company's achievement of all of its long-term financial targets."


Rate Their Stock Picks:

Which stock do you like best? Miller: Lam Research Deahna: DuPont Photomasks Rogers/Pitzer: KLA-Tencor