Thursday, July 27, 2006

Color on quarter: Mattson Tech (MTSN)

- While it seems that most investors and analysts were waiting for Mattson Tech (NASDAQ:MTSN) to report a strong qtr and upside guidance it seems all they got was yet another disappointment. The co pushed out gross margin recovery by another 6 months. I don't see any downgrades but several firms are cutting their tgts.

* Deutsche Bank notes Mattson delivered strong 2Q06 orders and revenue, but disappointed on GM, and 3Q06 guidance followed the same trend. Further penetration of Japan and a resurgence of older 300mm tool demand depressed GM, extending the time to the 46% GM goal by two quarters (to 2Q07).

Firm maintains their Buy rating on MTSN, but cuts their price target to $10, or ~19x C2007 EPS estimate of $0.51 (excluding ~$0.03 in stock option expenses).

* Citigroup notes that margins continue to disappoint with targets pushed out another six months with competitive pricing pressure (they believe) more of a culprit than MTSN suggesting; working capital mgmt remains disappointing.

Product mgns have not improved in ~2 yrs despite better product mix + move to flexible outsourced model - these executional issues obscure share gains with new Suprema tool. Firm notes that share gains took them off Sell, but execution must improve dramatically to take them off Hold. Ests tweaked, tgt $10 to $9 - Reit Hold.

* Stifel notes that while they suspected that there may be some downside risk to their gross margins forecast, they were disappointed to see the company's final 40.5% result.
The weak margins can be attributable to two main reasons, 1) a pickup in some of Mattson's older but lower margin products in the quarter (which they had suspected), and 2) SAB101 revenue recognition policies, where deferrals could have a near term negative impact to margins (which they did not anticipate).

Unfortunately, they firm believes that these pressures will continue at least through the September quarter, and possibly in the December quarter as well. With all these aspects in mind, we are not changing their revenue forecasts for 2006 or 2007, but are lowering EPS estimates due to the lower margin profile.

Given the current stock price, they see limited downside ($7) risk, and hence will maintain Buy rating. Along with our EPS reduction, they are lowering price target to $12 from $14, which reflects approximately 3.0x book value, and is in line with firm's more cautious outlook for the industry.

While they still believe Mattson can be a long-term outperformer (which it has shown on the market share side), they believe it needs to bolster its margin profile before they can apply a premium multiple to the name.

Notablecalls: I fully expect MTSN to trade down today. Maybe as much as a full point.

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