STMicroelectronics N.V.

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Laurence Lambert George
5 years ago
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1 ENN Europe France Semiconductors 11 Aug 2004 Deutsche Bank STMicroelectronics N.V. Reiterate cautious industry stance and lowering price target Recommendation Buy Price at 11 Aug 2004 EUR Target Price EUR18 (USD22) (was EUR20 / USD24) Ticker/Code STM.PA ADR Ticker STM.N Conversion Ratio 1:1 Price Performance (%) REL. STMICROELECTRONICS CAC 40 INDEX (R.H.SCALE) N.V. Relative Performance 1m -12.7% 3m -14.0% 12m -23.8% Nicolas Gaudois nicolas.gaudois@db.com John van Steenberghe john.van.steenberghe@db.com Amit Sharma amit.sharma-eq@db.com Year End PBT EPS DB EPS P/E EV / 31-Dec Revenue DB Stated DB Stated growth (DB EPS) Sales DPS USDm USDm USDm USD USD % x x USD , , E 9, E 10,158 1,582 1, Source: Deutsche Bank Estimates and Company Data : "DB" means pre goodwill, non-recurring items Shares Outstanding (Million): 884 Market Cap (million): USD 15,663.0 Local Index (.FCHI): 3, week High/Low: USD We are lowering our PT to E18 from E20 to reflect deteriorating industry fundamentals and to further adjust to through-cycle (rather than peak) valuations. STM remains, however, one of our preferred relative plays in the sector with key catalysts being 1) delivery on gross margins targets; 2) further improvement in operating leverage and; 3) intrinsic defensive characteristics. We see limited downside from here and reiterate our Buy rating.! Sector correction likely to continue: We are publishing today a detailed global report ("After the 2Q Blow-up, where do we stand?"). We remain of the view that semis YoY revenue growth will sharply decelerate as of 2H04. We believe that the risk of negative earnings revisions, coupled with valuations still well above former troughs, will likely put further pressure on semiconductor stocks. We expect near term catalysts to remain largely negative with further 3Q negative pre-announcements not to be excluded - and would therefore see any rebound in the sector as essentially short lived.! Limited near term risks: We believe STM's 3Q guidance (2-8% seq. revs. growth; GMs of 37.5% +/-50bps) is wide enough to likely buffer any risk of negative pre-announcement. The recent miss from NSM (Hold - covered by Ross Seymore) has some implications on potential growth at STM's DSG (19% of revs.) but likely offset by strength elsewhere. We continue to believe that low levels of inventories, improving manufacturing efficiency, higher utilisation rates as well as stable pricing should allow STM to reach its GM targets. We also see further efficiency gains at both the R&D and SG&A level.! Reiterate Buy - lowering PT: We are lowering our PT to E18 (US$22) from E20 (US$24). Our revised PT is based upon a 22x through-cycle ('04-07) EPS est. of E0.83/US$1.00. The premium to historic average market multiples (16x) is justified by our expectation of STM to likely to sustain a 11.5% ROCE through a cycle (vs. a cost of capital of 8.9%). STM currently trades at 12.5x '05E earnings, 16.9x trough cycle earnings, 1.30x forward 12m sales - compared with a trough of 1.1x (implying E12.2). Risks to the downside remain a "hard landing" economic scenario shortening the semis cycle as well as further erosion of the US dollar against the Euro. Deutsche Bank AG Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.

2 Table 1: STM quarterly P&L (US$ m) 1Q04 2Q04 3Q04E 4Q04E FY04E 1Q05E 2Q05E 3Q05E 4Q05E FY05E Net Revenues 2, , , , , , , , , ,157.7 Cost of sales 1, , , , , , , , , ,968.1 Gross Profit % margin 35.4% 37.4% 37.9% 40.4% 37.9% 39.5% 40.6% 41.6% 43.0% 41.2% SG & A R & D Restructuring Costs Other Expense Operating expense EBIT % margin 3.9% 8.2% 9.6% 14.1% 9.2% 11.9% 13.4% 15.7% 18.3% 15.0% Interest Income Other income EBT Taxes Tax Rate 1.3% 13.4% 16.0% 16.0% 14.1% 16.0% 16.0% 16.0% 16.0% 16.0% Minority Interest Net Income EPS EPS diluted

3 Table 2: STM divisional quarterly revenues and EBIT (US$ m) 1Q04 2Q04 3Q04E 4Q04E FY04E 1Q05E 2Q05E 3Q05E 4Q05E FY05E Breakdown by Business Unit Telecom, Computer & Automotive (TPA) Discrete & Standard Products (DSG) Memory Products (MPG) Consumer & Micro (CMG) Other (NVG) Total Operating Income Telecom, Computer & Automotive (TPA) Discrete & Standard Products (DSG) Memory Products (MPG) Consumer & Micro (CMG) Other (NVG) Total Operating Margin (%) Telecom, Computer & Automotive (TPA) Discrete & Standard Products (DSG) Memory Products (MPG) Consumer & Micro (CMG) Other (NVG) Total Table 3: STM annual P&L (US$ m) E 2005E Net Sales 5,056 7,813 6,357 6,318 7,238 9,013 10,158 annual change (%) 19.0% 54.5% -18.6% -0.6% 14.6% 24.5% 12.7% Cost of good sold 3,055 4,217 4,047 4,020 4,671 5,597 5,968 Gross Profit 2,002 3,596 2,310 2,298 2,566 3,416 4,190 % margin 39.6% 46.0% 36.3% 36.4% 35.5% 37.9% 41.2% SG & A ,025 R & D 836 1, ,022 1,238 1,527 1,570 Other (Income) & Expense (40) 83 6 (7) EBIT (pre-restructuring) 672 1, ,591 Restructuring Costs EBIT 672 1, ,521 % margin 13.3% 22.8% 10.2% 9.5% 4.6% 9.2% 15.0% Net Interest income (13.0) (68.1) (51.9) (9.0) 2.0 Other Non-Operating Income (316.1) (11.0) (39.6) (4.0) 0.0 Pre-tax profit 707 1, ,523 Tax Expense (13.9) Effective tax rate % 22.2% 20.5% 19.0% 17.0% -5.7% 14.1% 16.0% Minorities (2.7) (2.2) (3.2) (3.6) (2.7) (1.0) (4.0) Reported Earnings 547 1, ,275 annual change (%) 33.1% 165.4% -82.3% 67.0% -41.0% 177.7% 81.1% % margin 10.8% 18.6% 4.0% 6.8% 3.5% 7.8% 12.6% EPS EPS Diluted

4 Appendix 1 Important Disclosures Additional information available upon request Disclosure Checklist Company Ticker Price Disclosure National Semiconductor NSM $ STMicroelectronics STM E , 8, 9, 13 Texas Instruments TXN $19.9 6, 8, 9, 13, 14, Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public offering for this company, for which it received fees. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company. 3. Deutsche Bank and/or its affiliate(s) acts as a corporate broker or sponsor to this company. 4. The research analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company or derivatives thereof. 5. The research analyst (or, in the US, a member of his/her household) is an officer, director, or advisory board member of this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 8. Deutsche Bank and/or its affiliate(s) expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 9. Deutsche Bank and/or its affiliate(s) was a member of a syndicate which has underwritten, within the last five years, the last offering of this company. 10. Deutsche Bank and/or its affiliate(s) holds one percent or more of the share capital of the company whose securities are subject of the research, calculated under computational methods required by German law (data as of the last trading day of the past month). 11. See footnote headed Special Disclosures for any other relevant disclosures. 12. Deutsche Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of the company whose securities are subject of the research, calculated by methods required by German law as of the last trading day of the past month. 13. Deutsche Bank and/or its affiliate(s) holds a trading position, as that term is defined by German law, in shares of the company whose securities are subject of the research. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at

5 Special Disclosures Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report (Nicolas Gaudois). Deutsche Bank Research Ratings Key Buy: Hold: Sell: Total return expected to appreciate 10% or more over a 12 month period. Total return expected to be between 10% to -10% over a 12 month period. Total return expected to depreciate 10% or more over a 12 month period. The target prices of shares mentioned in the accompanying text are based on an assumed investment horizon of 12 months. If company notes are published on these shares in the future, the target prices mentioned in the subsequent notes will have priority. Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively Deutsche Bank ). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about Deutsche Bank, Deutsche Bank makes no representation as to the accuracy or completeness of such information. This published research report may be considered by Deutsche Bank when Deutsche Bank is deciding to buy or sell proprietary positions in the securities mentioned in this report. For select companies, Deutsche Bank equity research analysts may identify shorter-term opportunities that are consistent with Deutsche Bank's existing, longer-term Buy or Sell recommendations. This information is made available on the SOLAR stock list, which can be found at Deutsche Bank may engage in securities transactions in a manner inconsistent with this research report and with respect to securities covered by this report, will sell to or buy from customers on a principal basis. Disclosures of conflicts of interest, if any, are discussed at the end of the text of this report or on the Deutsche Bank website at Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor s home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this report is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright 2004 Deutsche Bank AG

Pirelli & C Real Estate

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