Cymer Inc.: A Bright Light For the Chip Equipment Industry

| About: Cymer, Inc. (CYMI)

Cymer Inc. (NASDAQ:CYMI) is the world leader in excimer laser light sources for deep ultraviolet [DUV] photolithography, a key process for printing the circuit patterns on advanced semiconductor chips. It's a behind-the-scenes company that is well positioned for the chip industry's push to squeeze ever-tinier circuitry onto chips and make them smaller, faster, and more efficient.

Cymer is not a very big company with $544 million in revenues and a market cap of $1.6 billion, but its lasers are an essential component to DUV photolithography, and DUV is an enabling technology for the modern chip industry. Cymer light sources are used to make semiconductors for just about every consumer electronic device from PCs and cell phones to MP3 players, PDAs, appliances, and cars.

Cymer is delivering solid profits and growth is expected to continue at a 20% rate over the next five years. Semiconductor equipment stocks have a reputation as highly cyclical and the chip industry in general has experienced many painful slumps in recent years, but Cymer's been a relatively steady performer. Chip gear stocks are coming of a good year, and several Wall Street analysts have issued bullish predictions for these stocks lately in anticipation of strong earnings reports in the next few quarters. Cymer is scheduled to report earnings next week.

Cymer's laser systems are used in the photolithography process of semiconductor manufacturing. Its excimer lasers have really pushed chip making to the next level over the last decade. The company now has an installed base of over 3,000 light sources. These complex optical systems mix rare gases with halogen to produce pulses of short-wavelength light, and when they are built into chip-making equipment they enable semiconductor manufacturers to squeeze ever-tinier circuitry onto chips. Cymer owns the market for excimer light sources.

There are potentially competing technologies being developed such as electronic beam and X-ray systems, but these appear to be much more expensive than DUV. Meanwhile, Cymer continues to push the DUV envelope. In February, Cymer shipped the first argon fluoride (ArF) laser light source for 45nm production immersion photolithography. The company is also developing the technology of next generation light source systems for extreme ultraviolet, or EUV, which may come into use after 2010.

Investors will need to keep an eye on that horizon and the chip industry will probably cycle through booms and busts in between, but for now Cymer is at the heart of a critical process in advanced chip making. The stock is trading at a fairly moderate P/E of 18.6 using trailing earnings and 13 times forward earnings estimates. If the outlook for the chip equipment industry remains favorable and the company delivers a good report next week, CYMI would seem to have room for a little expansion in that multiple.

The company is scheduled to report first quarter results on April 24 and the consensus is for earnings of 65 cents per share compared to 52 cents a year ago. For all of this year, Cymer is seen earning $2.75, and in 2008 the consensus stands at $3.26. Revenue is seen at $585 million this year and $657 million next.

  • The Good: Dominant Player, Key Technology
  • The Bad: Stock Price Doubled in Two Years
  • The Ugly: Vicious Chip Industry Cycles
  • CYMI 1-yr chart

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