STOCKREPORTS		 Novellus Systems, Inc. Nasdaq Symbol NVLS
In S&P SmallCap 600
19-JUL-97 Industry:
Equipment (Semiconductor)		 Summary: This company manufactures, markets and services automated wafer fabrication systems for chemical vapor deposition (CVD) of thin films used in semiconductor manufacturing.

Recent Price 94.38
52 Wk Range 95.94 - 34.25		 Yield Nil
12-Mo. P/E 18.7

Quantitative Evaluation:
Outlook (1 Lowest - 5 Highest)
4-
Fair Value
109.00
Risk
HIGH
Earn/Div Rank
B
Technical Evaluation:
BULLISH since 10/95
Rel. Strength Rank (1 Lowest - 99 Highest)
85
Insider Activity
Neutral

Overview 02-JUN-97

Now that the company has settled its patent infringement litigation with Applied Materials, which eliminated the threat of a business disruption, we look for revenues to decline by a modest 5% in 1997. The company continues to struggle due to the current industry-wide slump; its book-to-bill ratio remained below 1.0 in the first quarter of 1997, although improvement is expected soon. We look for revenues to increase sequentially for the remainder of the year, as industry fundamentals are improving. Margins will narrow on the lower volume and unfavorable changes in the product mix. We look for EPS to decline to $4.25 in 1997. This estimate excludes an $80 million charge the company will take in the second quarter related to the settlement of the patent infringement suit. Longer term, the company will benefit from the favorable market reception to systems introduced since 1995, which now account for 50% of total revenues.

Valuation 02-JUN-97

We are maintaining our "hold" rating on the shares. With NVLS's legal issues resolved, the stock will trade on business fundamentals going forward, and we feel the shares are fairly valued at 19X our 1997 EPS estimate. At current prices, the stock is already discounting a brisk recovery in earnings in 1998, so we recommend that investors not add to their positions at this time. NVLS remains a good long term holding for aggressive investors. The company's technological strength should allow it to remain a major player in the growing but cyclical semiconductor capital equipment industry. Its planned entry into physical vapor deposition (PVD) systems via an acquisition will allow NVLS to offer an entire set of deposition processes for 0.25 micron devices and below.

Key Stock Statistics

S&P EPS Est. 1997 4.25
P/E on S&P Est. 1997 22.2
S&P EPS Est. 1998 4.25
Dividend Rate/Share Nil
Shs. outstg. (M) 16.4
Avg. daily vol. (M) 0.929
Tang. Bk. Value/Share 22.99
Beta 2.41
Shareholders 600
Market cap. (B) $ 1.6
Inst. holdings 80%
Value of $10,000 invested 5 years ago:$ 44,411

Fiscal Year Ending Dec. 31

Revenue (Million $)
1997 1996 1995 1994 1993 1992
Q1 101.6 115.3 76.13 42.44 20.96 21.59
Q2 NA 120.3 87.40 51.03 25.28 14.51
Q3 NA 121.6 100.4 59.53 29.97 16.32
Q4 NA 104.6 109.8 71.68 37.33 17.37
Year NA 461.7 373.7 224.7 113.5 69.80

Earning Per Share ($)
1997 1996 1995 1994 1993 1992
Q1 0.91 1.55 0.98 0.47 0.15 0.28
Q2 E1.04 1.60 1.12 0.60 0.25 0.01
Q3 E1.12 1.53 1.27 0.75 0.32 0.05
Q4 E1.18 1.02 1.45 0.90 0.38 0.10
Year E4.25 5.70 4.82 2.72 1.10 0.44

Dividend Data: No cash dividends have been paid. The shares were split two for one in 1990.

Business Summary 02-JUN-97

Novellus Systems designs, manufactures, markets and services chemical vapor deposition (CVD) equipment used in fabricating integrated circuits (ICs). Deposition is a process in which a film of either electrically insulating (dielectric) or electrically conductive material is deposited on the surface of a silicon wafer. Intermetal dielectrics are required to insulate conductive layers, which help transfer information among an IC's transistors, from each other.

The company's objective is to increase its market share in the worldwide CVD market and strengthen its position as a leading supplier of semiconductor processing equipment. To attain this goal, the company's strategy is to provide its customers with systems that achieve the highest levels of wafer throughput, yield (the percentage of functioning ICs to the total produced), and film quality. In addition, the company plans to maintain a leadership position in CVD technology, to allow its systems to utilize the most advanced CVD processes. Finally, NVLS will focus its marketing efforts on major semiconductor manufacturers. The company has sold at least one CVD system to each of the 20 largest semiconductor manufacturers in the world.

The company's CVD products include the Concept One-Dielectric system, which can deposit a variety of insulating films on a wafer. A modified version, the Concept One-W, deposits tungsten metal on wafers. The tungsten acts as a metal interconnect between conductor layers in an IC. The Concept Two is a modular, integrated CVD system that can deposit both dielectric and conductive metal layers by combining one or more processing chambers around a common, automated robotic wafer handler. The Concept Two-ALTUS combines the modular architecture of the Concept Two system with an advanced tungsten CVD process chamber. The Concept Two-Dual ALTUS, with a dual advanced tungsten CVD process chamber, addresses state-of-the-art, 0.35-micron linewidth processing needs. In 1996, NVLS introduced Speed, its high-density plasma deposition tool for 0.35-micron linewidth ICs and below.

Novellus settled a longstanding legal matter with Applied Materials (Nasdaq: AMAT), the company's chief competitor, in May 1997. In April 1997, a jury in a U.S. District Court ruled against the company in a patent infringement suit filed by AMAT. Under terms of the agreement, NVLS agreed to pay AMAT $80 million and a royalty for all future revenues of TEOS-based systems, which is the process that was the subject of the lawsuit.

In May 1997, NVLS entered the market for physical vapor deposition systems (PVD) through the acquisition of the Thin Film Systems business of Varian Associates Inc. (NYSE: VAR) for $150 million in cash.

Capitalization

Long Term Debt: None (3/97).

Per Share Data ($)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Tangible Bk. Val. 22.99 17.11 13.25 7.44 6.04 5.73 4.18 3.07 1.53 -3.06
Cash Flow 6.38 5.26 2.96 1.35 0.66 1.28 1.11 0.94 0.30 -0.39
Earnings 5.70 4.82 2.72 1.10 0.44 1.15 1.01 0.87 0.25 -0.41
Dividends Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Payout Ratio Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Prices - High 64 1/2 87 1/4 56 1/2 37 26 1/2 27 1/4 18 9 7/8 4 1/2 NA
- Low 31 1/2 42 3/4 25 3/4 14 7 3/4 10 1/2 5 1/2 4 3/8 2 3/4 NA
P/E Ratio - High 11 18 21 34 60 24 18 11 18 NA
- Low 6 9 9 13 18 9 5 5 11 NA

Income Statement Analysis (Million $)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Revs. 462 374 225 114 69.8 80.0 67.1 51.0 23.2 3.3
Oper. Inc. 148 123 67.7 27.1 10.9 24.7 20.6 16.4 4.5 -3.2
Depr. 11.3 7.7 4.0 3.7 3.2 1.9 1.4 0.9 0.6 0.1
Int. Exp. 0.5 0.2 0.3 0.1 0.3 0.1 0.2 0.2 0.1 0.0
Pretax Inc. 145 125 68.1 24.8 9.4 25.4 21.7 17.3 4.2 -3.2
Eff. Tax Rate 35% 34% 34% 35% 34% 34% 36% 35% 40% NM
Net Inc. 94.0 82.5 44.9 16.1 6.2 16.8 14.0 11.2 2.5 -3.2

Balance Sheet & Other Fin. Data (Million $)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Cash 177 150 137 48.6 43.0 40.5 39.8 30.0 11.8 0.2
Curr. Assets 374 318 234 109 79.2 79.3 62.8 45.6 21.1 2.9
Total Assets 460 365 265 131 97.3 94.7 68.9 50.5 23.9 4.7
Curr. Liab. 86.1 92.0 50.8 25.7 13.9 12.8 12.4 10.1 6.4 1.9
LT Debt Nil Nil Nil Nil 0.8 1.0 0.4 0.8 0.7 0.5
Common Eqty. 374 273 214 105 82.7 80.9 56.1 39.5 16.6 -5.2
Total Cap. 374 273 214 105 83.4 81.9 56.5 40.3 17.4 2.7
Cap. Exp. 35.2 19.3 6.9 6.6 5.1 10.2 2.5 2.5 0.9 1.0
Cash Flow 105 90.2 48.9 19.8 9.5 18.7 15.5 12.2 3.1 -3.0

Curr. Ratio 4.3 3.5 4.6 4.3 5.7 6.2 5.1 4.5 3.3 1.5
% LT Debt of Cap. NM NM Nil Nil 0.9 1.2 0.7 1.9 4.2 19.9
% Net Inc.of Revs. 20.4 22.1 20.0 14.2 8.9 21.0 20.9 22.1 11.0 NM
% Ret. on Assets 22.8 26.0 21.7 13.9 6.6 20.1 23.1 28.6 9.4 NM
% Ret. on Equity 29.1 33.9 26.9 16.9 7.7 24.0 28.8 38.0 NM NM

Data as orig. reptd.; bef. results of disc. opers. and/or spec. items. Per share data adj. for stk. divs. as of ex-div. date. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked.

Office--81 Vista Montana, San Jose, CA 95134. Tel--(408) 943-9700. Chrmn, Pres & CEO--R. S. Hill. VP & CFO--R. H. Smith Treas--J. Root. Dirs-- D. J. Guzy, R. S. Hill, T. Long, G. Possley, R. H. Smith, J. Van Poppelen. Transfer Agent & Registrar--Chemical Trust Co. of California, San Francisco. Incorporated--in California in 1984. Empl-- 1,143. S&P Analyst: Stephen T. Madonna, CFA


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