Opportunity for Varian Semi: Applied Materials Shuts Ion Implant Business

Includes: AMAT, VSEA
by: Eric Savitz

Applied Materials (NASDAQ:AMAT) yesterday announced that it will shut down its Applied Implant Technologies group based in Horsham, England.

The move affects 270 people, mostly in Horsham, and will result in costs of $90 million to $130 million over the next four quarters. Applied said that the implant business “has moved towards commoditization” and that projected future financial performance “does not warrant” investing in next-generation “beamline” implant products.

That was not going to be the big news for Applied yesterday; the more important news were fourth quarter results, after the close. But it seems to be good news for Applied rival Varian Semiconductor (NASDAQ:VSEA). Yesterday, J.P. Morgan’s Jay Deahna raised his rating on the company to Overweight from Neutral, on the theory that Applied’s decision represents a big opportunity for Varian, which also plays in the “high current” ion implant market. Deahna figures that market is about $750 million in size, and that Applied had about 35% of it. If Varian can take 80% of that, it would be an extra $200 million in revenue; he added $165 million to his model for Varian, spread over six quarters.

His 2007 EPS estimate increases to $2.55 a share from $2.51; for 2008, he goes to $3.22 a share, from $2.84.

“Despite the near-term concerns with exposure to memory, we expect Varian to deliver consistent and compelling upside to consensus EPS estimates in [the second half] and beyond on share gains and potentially on margin expansion, the latter of which is likely upside to our model,” he writes. Deahna set a price target on the stock of $58.

Yesterday, Varian shares are up $1.52, or 3.7%, to $42.67.