GTAT Analyst Round: the Good, the Bad and the Ugly

by Matt Margolis

GTAT is expected to announce the date of their Q1 2014 earnings release and conference within the next week.  I’m expecting GT to announce their Q1 2014 results and host their earnings conference call on Monday May 5th.  The consensus estimates I’ve gathered from the analyst community is for GT to post Q1 sales of $31 million and a loss per share of $0.24.  My Q1 2014 estimate is aligned with the analyst community, I am projecting sales of  $28 million and a loss per share of $0.24.  I’m going to be laser focused on the capital spending that GT reports for Q1 2014 as well as to see if additional PP&E was deployed, most if not all this capital is related to the ramp up occurring in Mesa, AZ.  Another line item I am curious about is the headcount, as GT expected its global headcount to reach 1,000 employees by the middle of 2014, up from 541 employees as of 12/31/13.    Most of these new employees will be located in Mesa, AZ so the headcount will shed some light into the equipment ramp and overall status of the Mesa sapphire facility through March 2014.   I have shared information on several occasions that the Mesa sapphire plant went live with 140 tools (sapphire growth furnaces) on 1/10/14 and significantly increased the number of active tools by the middle of February as evidenced by their building permit request to make changes to the MV (medium voltage) fuse to accommodate the tool load.

 

Q1 2014 Analyst Revenue and EPS Estimates

As I stated above the consensus estimates for Q1 2014 across the board are very much aligned.  Listed below is the chart of the Q1 2014 revenue and earning estimates by analyst.

 

2014 Analyst Revenue and EPS Estimates

 

The 2014 analyst revenue consensus is $714 million and positive EPS of $0.12.   Revenue estimates range from $671 million (Stifel) to $797m (UBS) and EPS estimates range from $0.04 to $0.17.   It’s interesting that not one analyst decided to “think outside the box,”  because every single one of them stayed within GT managements 2014 guidance “box” of $600 to $800 million of revenue and EPS of $0.02 to $0.18.

My  2014 revenue estimate was based on a bottom’s up approach including  focus on Apple’s iPhone 6, iWatch and iPod 2014 unit volume sales plus two additional months of inventory build.  I am firmly in the camp that Apple will introduce sapphire cover screens on both iPhone 6 models (4.7″ and 5.5″ models), the iWatch as well as the redesigned iPod touch.  My estimated Apple revenue is $1,180 million or 89% of my FY 2014 revenue.  I’m currently estimating 2014 revenue of $1,331 million and EPS of $0.62, this would represent $534 million in revenue and $0.44 of EPS above street high analyst estimates.

 

2015 Analyst Revenue and EPS Estimates

The 2015 analyst revenue consensus is $1,258 million and positive EPS of $0.90.   Revenue estimates range from $1,086 million (Stifel) to $1,643 million (Credit Suisse) and EPS estimates range from $0.45 to $1.49.   Stifel, Canaccord and Bank of America might be 3 sport athletes but they clearly do not know which sport GTAT is playing.   At a minimum I would have thought those 3 firms could have at least a minimum taken their 2014 estimates, calculated the impact of a full year for GT’s Apple business and simply added a simple unit growth estimate that is consistent with industry smartphone trend.  I know this financial modeling exercise could take a good analyst a few minutes but I figured the “Wall Street” heavyweights could at least put in a few hours to come up with something that resembles a coherent thought to support their 2015 estimates.  I fully expect GT’s 2015 analyst consensus for revenue to trend north of $2,000 million and EPS estimates to be at or above $2.00 per share driven largely by what is actually going on inside the Mesa, AZ sapphire facility.  GT’s management has guided 2015 of over $1,000 million and they have not provided an updated EPS estimate for 2015.

My  2015 revenue estimate was based on a bottom’s up approach including Apple unit sales and expected market adoption across GT’s diversified product portfolio.  The chart below breaks my 2015 revenue into key revenue category so you can  see my expected revenue contribution by each line of business.  My estimated Apple revenue for 2015 is $2,027 million or 64% of my 2015 FY revenue estimate, which is down from 89% of total revenue in 2014.   I’m currently estimating 2015 revenue of $3,177 million and EPS of $2.84, this would represent $1,534 million in revenue and $1.35 of EPS above street high analyst estimates.

 

2016 Analyst Revenue and EPS Estimates

Before I get into the 2016 estimates I first want to blast every analyst but Credit Suisse.  Three out of six dropped out of GTAT’s analyst class before they finished their 2015 EPS estimates.  Only one analyst actually completed their 2016 revenue and EPS homework assignment for GTAT.  The remaining 5 analysts need tighten up the belt, focus and listen to Pooh and just, “think, think, think!”

The 2016 analyst revenue consensus is $1,923 million and positive EPS of $1.83.   Revenue estimates range from $1,637 million (Stifel) to $2,748 million (Credit Suisse) and EPS estimates range from $1.25 to $3.00.  Credit Suisse revenue and EPS estimates are actually 50% higher than the rest of the peer group.  Now it’s clear to you as well that the analysts outside of Credit Suisse dropped out of GTAT’s analyst class and failed to do their home for 2016!  I fully expect GT’s 2016 analyst consensus for revenue to trend north of $3,000 million and EPS estimates to be at or above $3.00 per share driven largely by GT’s Hyperion, HicZ and Merlin technologies, which will all see tremendous growth and adoption by 2016.   GT’s managements guidance for 2016 is EPS in excess of $1.50 per share, however GT has not provided a revenue estimate for 2016.

My  2016 revenue estimate was based on a bottom’s up approach including Apple unit sales and expected market adoption across GT’s diversified product portfolio including a significant pickup in Hyperion, HicZ and Merlin technology sales.  The chart below breaks my 2016 revenue into key revenue category so you can see my expected revenue contribution by each line of business.  My estimated Apple revenue for 2016 is $2,216 million or 47% of my 2016 FY revenue estimate, which is down from 89% and 64% of total revenue in 2014 and 2015.   It should be noted that the Apple % of GT’s total sales in my model are expected to decrease year over year as GT’s diversified growth strategy continues to bear fruit from the seedlings that were planted over the last few years.  I’m currently estimating 2016 revenue of $4,736 million and EPS of $5.26, this would represent $1,988 million in revenue and $2.26 of EPS above street high analyst estimates.

 2014 to 2016 Revenue and EPS Estimates, Price Targets and Key Ratios

The chart below has all of the goodies you want to know.  The average analyst Price Target is $21.89 and it ranges from $26 (Credit Suisse) to $13.75 (Stifel).  The average analyst Price Target yields a 2016 forward PE of 12 based on an average 2016 EPS estimate of $1.83.  My price target is currently $85 based, which actually only represents a forward PE of 17 based on my 2016 EPS estimate of $5.26.

 

 

 

Conclusion

Most of the Wall Street analysts are deadbeat analysts when it comes to GT Advanced Technologies.  Credit Suisse has clearly put in the time and done all of their homework assignments for 2015 and 2016.  The rest of the Wall Street analyst community decided to drop out of the GTAT analyst class because they didn’t want to “think, think, think”.

I’ve done more than my fair share of thinking in regards to GT Advanced Technologies and the company’s future prospects.  My estimates are clearly much higher than Wall Street but so is the time I’ve dedicated to my craft.  Wall Street will continue to lag my estimates by 6 to 9 months and that should be expected.  I also want to be very clear that yes, GT needs to deliver on a lot of fronts to hit my revenue and EPS forecasts for 2014 through 2016 and there is certainly some risks that should be discounted.  However, at the same time, I believe Apple will likely introduce sapphire cover screens on the Apple iPad before the end of 2015.     A sapphire covered iPad could contribute an additional $1,000 million of annual revenue above and beyond my already street high estimates in the year following its initial release.  Additionally, Hyperion and Merlin technologies are game changers in their respective marketplaces and may generate an additional $1,000 million or more of additional sales that have not been included in my estimates.    Even Goldman Sachs is modeling 2018 Hyperion sales at over $2,000 million a year with a EPS contribution of $1.58, which assumes a 60% conversion of the market opportunity and a gross margin of 35%.  A slight shift Hyperion’s expected  adoption cycle to the left and GT’s sales could rise by billions sooner rather than later.    Lastly, GT has new products are waiting in the wings for the market to develop and although we have no clear line of sight to these new products and technologies today, it would be prudent to expect up to another $500m of new product revenue that will be moved over from R&D and introduced into the marketplace by 2016.

My price target is currently $85 based, which actually only represents a forward PE of 17 based on my 2016 EPS estimate of $5.26.  I try to stay away from PE ratios but GT’s expected rapid growth over the next several years could certainly support a PE of 30 to 50, once the world see’s how they can deliver the goods to Apple.  I will also let you do the math and take my 2016 EPS estimate and multiply it by a justified PE of 30 to 50 to see where I think GT’s share price could be headed over the next few years.  Yes I am fully aware that the math works out to a share price well into the triple digits and a market cap that exceeds $20 billion and to be honest that may just be the beginning for GT Advanced Technologies.

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours.