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 13.94 Target Price EUR18 (USD22) (was EUR20 / USD24) Ticker/Code STM.PA ADR Ticker STM.N Conversion Ratio 1:1 Price Performance (%) 40 35 30 25 20 15 10 2002 2003 2004 REL. STMICROELECTRONICS CAC 40 INDEX (R.H.SCALE) N.V. Relative Performance 1m -12.7% 3m -14.0% 12m -23.8% Nicolas Gaudois +44 20 754 75370 nicolas.gaudois@db.com John van Steenberghe +44 20 754 76362 john.van.steenberghe@db.com Amit Sharma +44 20 754 73637 amit.sharma-eq@db.com 0.9 0.8 0.7 0.6 0.5 0.4 0.3 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 2002 6,318 348 276 0.48 0.22-37.51 35.6 3.5 0.04 2003 7,238 327 242 0.28 0.29 28.63 61.1 3.1 0.08 2004E 9,013 894 820 0.75 0.80 129.79 22.6 2.2 0.12 2005E 10,158 1,582 1,523 1.35 1.44 71.50 12.5 2.0 0.12 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): 3,533.00 52-week High/Low: USD 30-17 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$1.00. The premium to historic average market multiples (16x) is justified by our expectation of STM to likely to sustain a 11.5% ROCE through a cycle (vs. a cost of capital of 8.9%). STM currently trades at 12.5x '05E earnings, 16.9x trough cycle earnings, 1.30x forward 12m sales - compared with a trough of 1.1x (implying E12.2). Risks to the downside remain a "hard landing" economic scenario shortening the semis cycle as well as further erosion of the US dollar against the Euro. Deutsche Bank AG Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Table 1: STM quarterly P&L (US$ m) 1Q04 2Q04 3Q04E 4Q04E FY04E 1Q05E 2Q05E 3Q05E 4Q05E FY05E Net Revenues 2,029.0 2,172.0 2,280.6 2,531.5 9,013.1 2,379.6 2,451.0 2,573.5 2,753.7 10,157.7 Cost of sales 1,311.0 1,360.0 1,416.0 1,509.6 5,596.6 1,439.6 1,456.2 1,503.1 1,569.2 5,968.1 Gross Profit 718.0 812.0 864.6 1 021.9 3 416.4 940.0 994.8 1 070.4 1 184.4 4 189.6 % margin 35.4% 37.4% 37.9% 40.4% 37.9% 39.5% 40.6% 41.6% 43.0% 41.2% SG & A 230.0 239.0 245.0 255.0 969.0 250.0 255.0 255.0 265.0 1 025.0 R & D 363.0 384.0 385.0 395.0 1 527.0 385.0 390.0 395.0 400.0 1 570.0 Restructuring Costs 33.0 12.0 15.0 15.0 75.0 20.0 20.0 15.0 15.0 70.0 Other Expense 12.0-2.0 1.0 1.0 12.0 1.0 1.0 1.0 1.0 4.0 Operating expense 638.0 633.0 646.0 666.0 2 583.0 656.0 666.0 666.0 681.0 2 669.0 EBIT 80.0 179.0 218.6 355.9 833.4 284.0 328.8 404.4 503.4 1 520.6 % margin 3.9% 8.2% 9.6% 14.1% 9.2% 11.9% 13.4% 15.7% 18.3% 15.0% Interest Income -4.0-3.0-2.0 0.0-9.0 0.0 0.0 1.0 1.0 2.0 Other income 0.0-4.0 0.0 0.0-4.0 0.0 0.0 0.0 0.0 0.0 EBT 76.0 172.0 216.6 355.9 820.4 284.0 328.8 405.4 504.4 1 522.6 Taxes 1.0 23.0 34.7 56.9 115.6 45.4 52.6 64.9 80.7 243.6 Tax Rate 1.3% 13.4% 16.0% 16.0% 14.1% 16.0% 16.0% 16.0% 16.0% 16.0% Minority Interest 0.0-1.0 0.0 0.0-1.0-1.0-1.0-1.0-1.0-4.0 Net Income 75.0 148.0 181.9 298.9 703.8 237.6 275.2 339.5 422.7 1 275.0 EPS 0.08 0.17 0.21 0.34 0.80 0.27 0.31 0.38 0.48 1.44 EPS diluted 0.08 0.16 0.19 0.32 0.75 0.25 0.29 0.36 0.45 1.35
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) 840 842 876 954 3512 912 936 978 1037 3863 Discrete & Standard Products (DSG) 356 419 440 484 1699 460 474 492 517 1943 Memory Products (MPG) 452 509 550 632 2143 569 592 639 709 2509 Consumer & Micro (CMG) 364 386 394 433 1577 416 428 437 463 1744 Other (NVG) 17 16 22 28 82 24 21 27 27 99 Total 2029 2172 2281 2531 9013 2380 2451 2574 2754 10158 Operating Income Telecom, Computer & Automotive (TPA) 114 109 118 162 503 137 150 171 207 665 Discrete & Standard Products (DSG) 51 92 97 102 341 87 90 98 109 384 Memory Products (MPG) 5 39 55 95 194 68 77 102 138 386 Consumer & Micro (CMG) 18 22 26 35 100 29 34 48 65 176 Other (NVG) -108-83 -77-38 -306-37 -22-16 -16-91 Total 80 179 219 356 833 284 329 404 503 1521 Operating Margin (%) Telecom, Computer & Automotive (TPA) 13.6 12.9 13.5 17.0 14.3 15.0 16.0 17.5 20.0 17.2 Discrete & Standard Products (DSG) 14.3 22.0 22.0 21.0 20.1 19.0 19.0 20.0 21.0 19.8 Memory Products (MPG) 1.1 7.7 10.0 15.0 9.0 12.0 13.0 16.0 19.5 15.4 Consumer & Micro (CMG) 4.9 5.7 6.5 8.0 6.4 7.0 8.0 11.0 14.0 10.1 Other (NVG) -635-519 -358-135 -371-159 -104-58 -58-92 Total 3.9 8.2 9.6 14.1 9.2 11.9 13.4 15.7 18.3 15.0 Table 3: STM annual P&L (US$ m) 1999 2000 2001 2002 2003 2004E 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 534 704 642 648 785 969 1,025 R & D 836 1,026 978 1,022 1,238 1,527 1,570 Other (Income) & Expense (40) 83 6 (7) 5 12 4 EBIT (pre-restructuring) 672 1,783 685 635 539 908 1,591 Restructuring Costs 0.0 0.0 34.2 33.6 204.9 75.0 70.0 EBIT 672 1,783 651 601 334 833 1,521 % margin 13.3% 22.8% 10.2% 9.5% 4.6% 9.2% 15.0% Net Interest income 35.6 46.7 (13.0) (68.1) (51.9) (9.0) 2.0 Other Non-Operating Income 0.0 0.0 (316.1) (11.0) (39.6) (4.0) 0.0 Pre-tax profit 707 1,830 321 522 242 820 1,523 Tax Expense 157.2 375.2 61.1 88.9 (13.9) 115.6 243.6 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 1,452 257 429 254 704 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 0.64 1.66 0.29 0.49 0.29 0.80 1.44 EPS Diluted 0.61 1.55 0.29 0.48 0.28 0.75 1.35
Appendix 1 Important Disclosures Additional information available upon request Disclosure Checklist Company Ticker Price Disclosure National Semiconductor NSM $15.7 13 STMicroelectronics STM E13.94 6, 8, 9, 13 Texas Instruments TXN $19.9 6, 8, 9, 13, 14, 15 1. 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 http://equities.research.db.com.
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