GT Advanced Technologies' Path Forward: Bull Case Vs. Base Case

Aug.31.14 | About: GT Advanced (GTATQ)


I'm forecasting GT to exit Q4 2014 with EPS of $0.44 and $429m in revenue, or an annualized rate of $1.72 EPS and $1.72B in revenue heading into 2015.

My base-case scenario takes GT's revenues over $2B and EPS over $2.00 in 2015, with 2016 revenue over $3B and EPS over $3.00.

My bull-case scenario takes GT's revenues over $3B and EPS over $3.00 in 2015, with 2016 revenue over $4B and EPS over $5.00.

Original Publication Date: August 7th, 2014 by Matt Margolis via PTT Research FORENSICS

GT Advanced Technologies (GTAT) reported earnings on August 5th, 2014, and my key takeaways from GT's Q2 2014 earnings call are below. I have updated my financial model to reflect GT's path forward with two financial scenarios; a base-case and a bull-case scenario.

High Level Summary from GT's Earnings Call:

  • Revised 2014 EPS range from $0.02-0.18 to $0.12-0.18.
  • Revised 2014 Revenue range lower from $600m-800m to $600-700m.
  • Expects to receive final prepayment from Apple by October 31, contingent on reaching certain operational targets set by Apple.
  • GTAT is now capable of producing 6-inch diameter sapphire laminates measuring 26 microns in thickness.
  • GTAT has successfully exfoliated the thinnest freestanding SiC (Silicon Carbide) lamina in the world, measuring 32 microns in thickness and 2 inches in diameter.
  • GTAT expects low-volume Merlin revenue in Q3 2014, and expects Merlin to contribute significantly to FY 2015 results.
  • GTAT is working closely with worldwide leaders of Boron Neutron Cancer Therapy (BNCT) to incorporate Hyperion into clinical trials. Expect a purchase order before the end of 2014.
  • GTAT workforce comprises 1,100 employees and 700 contractors, up from just over 500 employees as of Dec '13.

My Financial Model Update: 2015 & 2016 Base Case and Bull Case

Base Case Details

  • $1.4B in Apple (NASDAQ:AAPL) revenues
  • $6 ASP for cover screens
  • $3.75 ASP for iWatch

Bull Case Details

  • $1.8B in Apple revenues
  • $8 ASP for cover screens
  • $3.75 ASP for iWatch

My most recent research leads me to believe Apple will pay $8 or less per 4.7″ sapphire screen and $9.50 for the 5.5″ sapphire screen. Although, I don't expect GTAT to sell sapphire at $6 per sapphire screen equivalent, I wanted to model my GTAT base case analysis assuming a lower ASP and annual Apple revenue levels.

I expect 85% of iPhones sold annually in 2015 and beyond to come with sapphire, up from my previous estimate of 70%. This means Apple will put sapphire cover screens on all iPhone 6 models by 2015. Legacy models, which I expect to make up 15% of units sold, may continue to use Gorilla Glass. I am still assuming a 25% gross margin on sapphire material sales to Apple.

I expect $300m of Merlin revenue in 2015, up from my previous estimate of $100m. The increase in Merlin revenue estimates were offset by a drop in traditional solar revenue that I expect to be pushed out slightly into 2016 versus the beginning in 1H of 2015.

In the charts below, I break out my revenue estimates by line of business, distinguishing between bull- and base-case scenarios. For 2015, my base case is over $2B in revenue and EPS over $2, with 2016 revenue over $3B and EPS over $3.

For 2015, my bull case is over $3B in revenue and EPS over $3, with 2016 revenue over $4B and EPS of $5.

I am estimating 2014 FY revenue to come in at $745m and non-GAAP EPS of $0.20, driven by significant revenue and EPS acceleration over 2H of 2014, compared to a $0.48 non-GAAP EPS loss on $81m of revenue during 1H of 2014. For the full-year 2014, I am modeling GT's sapphire screen unit sales at 53 million and sales of $429 million. I expect GT to deliver enough sapphire bricks to produce 15m sapphire cover screens in Q3 and 38m in Q4, assuming a 4.7" size. After I mix adjust my sapphire cover screen estimate to factor in both-sized iPhone 6 variations, it results in an FY 2014 sapphire screen estimate of 45m to 53m.

My forecast for Q3 2014 is $235m in revenue and non-GAAP EPS of $0.24. My forecast for Q4 2014 is $429m in revenue and non-GAAP EPS of $0.44, which amounts to $664m revenue and $0.68 non-GAAP EPS for GT during 2H of 2014. Annualized, the Q4 EPS exit rate of $0.44 EPS and $429m of revenue equates to $1.76 EPS on $1.72B in revenue as GT heads into 2015. GT's Q4 2014 exit rate is a significant measurement because it is driven largely by Apple materials revenue that is expected to be fully ramped up by early 2015.

In addition, GT expects Merlin to a significant contributor towards 2015 earnings, after contributing an insignificant amount of revenue in 2014. I also expect GT to book $100m of Hyperion revenue in 2015, mostly comprised of Proton Accelerators for use in cancer treatment research associated with Boron Neutron Capture Therapy (BNCT). If GT's Proton Accelerator technology is adopted for BNCT cancer treatment, GT may sell hundreds of Hyperion tools at an average of $10 to $15m per unit. Lastly, I am modeling GT's traditional solar capital equipment business to contribute $300m in 2015 sales, with much of it back-loaded in 2015. GT's backlog as of the end of Q2 2014 totaled $628m, and I expect the company to exit 2014 with over $500m still in backlog.

The Mesa facility will not be fully ramped until early 2015, and GT will be booking revenue from Merlin, Hyperion and other lines of business, so my 2015 base-case revenue estimate of $2.35B looks very reasonable.

(Image Source: Wall Street Forensics)

Price Target and PE Ratios

During my August 5th Q&A following GTAT's Q2 earnings call, someone asked what PE GT deserves and whether I am sticking to my $87.50 price target. I charted out GT's forward PE based on my base- and bull-case estimates for 2015 and 2016, and compared it to GT's forecasted EPS growth rate in 2016.

GT's EPS growth in 2016 is 50% under the base case and almost 70% under the bull case.

(Image Source: Wall Street Forensics)

At $87.50, GT's forward P/E would be slightly above 40 for my 2015 base case of $2 EPS and just under 30 for my bull-case scenario of $3 EPS.

Fast forward to 2016, however, and at $87.50, GT's forward P/E would be less than 30 for the base case of $3 EPS and under 20 for the bull case of $5 EPS. Overall, I believe my price target makes a lot of sense given the underlying fundamentals.

As I look ahead into 2015, I am completely dumbfounded by the GTAT Wall Street Analyst community estimates for 2015, which are currently $0.82 EPS on $1.14B in sales. I expect GT's 2H 2014 sales to total $664m revenue and $0.68 non-GAAP EPS, driven almost exclusively by sapphire equipment and Apple materials' revenue. In 2015, GT will enjoy the luxury of a full-year contribution from a fully ramped-up sapphire growth operation in Mesa, AZ as well as the continued expansion of the sapphire equipment capital cycle. On top of the Apple sapphire materials revenue and ASF equipment revenue, GT will enjoy a full-year contribution from GT's "ramp-ready" Merlin interconnect solar modules, as well as the revenue recognition of a handful of Hyperion Proton Accelerators units for BNCT cancer therapy research in 2015.

My price by the middle of 2015 for GT is $87.50; as for the remainder of 2014, I expect GT's shares to double from these levels and trade between $30 and $40 before 2014 is all said and done. The catalyst that will drive GT's share prices north of $40 will be watching the formation of the GT octopus (Apple sapphire materials, Merlin, Hyperion, sapphire equipment, traditional solar equipment and sapphire laminates for mobile devices) take shape by the middle of 2015.

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Disclosure: The author is long GTAT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.