It would seem like the incredible growth in semiconductors and the equipment used to make them would slow down after a torrid last few years. Surprisingly, however, 3D NAND and foundry spending remains very strong. If the positive tone at the recently finished Semicon West is any indication, the strength in the chip and chip equipment sector is poised to stay — and not just this year, but possibly well into 2018.
In a new research report from Stifel, the financial services firm acknowledges that much of the sectors good data and trends are factored in, but it continues to stay very positive on the top chip equipment companies on a near-term and long-term basis. The report noted this in regards to expectations going forward:
In terms of the stocks, we do believe that the “good news” in the environment is now generally being factored into the stock prices, but we could see some larger-than-expected upside surprises in the upcoming earnings season, which may provide an additional boost. Having said that, we believe that the strength in 2018 is not completely built in and thus, there is longer term upside to the group over the next few months once the focus completely shifts to 2018.
Five companies are favorites at the company, with two large-cap leaders pacing the group. All are rated Buy at Stifel.
This stock is a semiconductor capital equipment leader that some on Wall Street feel has the broadest range of exposure to 3D NAND and foundry display. Applied Materials Inc. (NASDAQ: AMAT) is the global leader in precision materials engineering solutions for the semiconductor, flat panel display and solar photovoltaic industries. Applied Material’s technologies help make innovations like smartphones, flat screen TVs and solar panels more affordable and accessible to consumers and businesses around the world.
The analysts are very positive on the stock and see Applied Materials benefiting not only on the semiconductor side of the business, but also from larger, higher resolution and flexible screens on the the display side of the business. The company reported solid first quarter earnings that were above consensus, and gave guidance that was inline with expectations. Most Wall Street analysts see continued FinFET capacity expansion (10nm/14nm/16nm) and the continued transition to 3D NAND, with DRAM spending remaining strong next year.
Applied Materials investors are paid a 0.87% dividend. The Stifel price target for the stock is $55.The Wall Street consensus price target is at $50.18. Applied closed Friday at $46.12.
Lam Research Corporation
This company remains one of the top chip equipment picks across Wall Street. Lam Research Corporation (NASDAQ: LRCX) designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers plasma etch products that remove materials from the wafer to create the features and patterns of a device. Many Wall Street analysts have highlighted the company and its peers as having a significant equipment opportunity from the NAND evolution as well. Lam Research also appears well positioned to gain share in the wafer fab equipment (WFE) market, driven by a strong focus on technology inflection spending over the next few years.
Despite so-so foundry and logic spending over the last year, many on Wall Street think that Lam will also continue to also benefit from technology transitions such as FinFET, 3D NAND, multi patterning, and advanced packaging in 2017 and beyond. Many analysts believe it is the “cleanest” semi cap story benefiting from cyclical tailwind, SAM expansion and share gains.
Lam Research reported solid results and an impressive shipment outlook. The company posted third-quarter fiscal 2017 non-GAAP earnings of $2.80 per share, which blew past the consensus estimate of $2.54. Earnings were up 16% sequentially and 130.9% year over year. Expectation are very high for fiscal fourth quarter results as well.
Shareholders are paid a 1.14% dividend. The Stifel price target is $155, and that compares with a consensus price objective of $154.55. The shares closed Friday at $157.30.
The Stifel analysts also remain positive on these three smaller capitalization companies.
This small cap play has seen some very solid insider buying over the last year. Entegris, Inc. (NASDAQ: ENTG) is a global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries.
The Company operates in three business segments: Specialty Chemicals and Engineered Materials (SCEM), Advanced Materials Handling (AMH) and Microcontamination Control (MC).
The analysts remain very positive on the stock and recently reiterated their Buy rating on the shares and raised the price target to $28 from $26. This compares with a consensus figure of $27.94. The stock closed trading on Friday at $24.55.
This is a company that flies somewhat lower under the radar, but offers solid upside. MKS Instruments (NASDAQ: MKSI) provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze critical parameters of manufacturing processes in the United States and internationally. The company operates through four segments: Advanced Manufacturing Capital Equipment, Global Service, Asia Region Sales, and Other.
MKS offers pressure measurement and control products used for various pressure ranges and accuracies; materials delivery products, including gas flow measurement products and vacuum valves; automation and control products, such as automation platforms, programmable automation controllers, temperature controllers, and software solutions for use in automation, I/O and distributed programmable I/O, gateways, and connectivity products; and vacuum products comprising vacuum containment components, effluent management subsystems and custom stainless steel chambers, vessels, and pharmaceutical process equipment hardware and housings.
The Stifel analysts feel the increase in Applied Material’s display equipment business will have positive implications for MKS as they supply many key subsystems for Applied’s display tools. In addition, MKS acquired Newport last year and added the company’s iconic Spectra-Physics laser brand to its product line-up.
MKS shareholders receive a 0.9% dividend. The Stifel price target is posted at $85, and the consensus is set at $73. Shares closed Friday at $79.20.
This a lesser known industry leader that could also have solid upside potential. Teradyne (NYSE: TER) provides automatic test equipment (ATE) serving semiconductors, printed circuit board assemblies, and other (automotive, broadband etc.) segments. Its products deliver a competitive advantage to semiconductor, electronics, automotive, and network systems companies. Teradyne operates in three segments: Semiconductor Test Systems, Assembly Test Systems, and Other Test Systems.
The analysts like this company as a somewhat ancillary play to the sector and cited the growing emerging robotics silo as more of a reason to own the shares than the fundamentals related to wafer fab equipment. The company also consistently buys stock back.
Shareholders are paid a small 0.85% dividend. The Stifel price target is posted at $40, and the consensus is set at $38.33. Shares closed Friday at $33.97.
It may make sense to buy partial positions now and see how earnings come out. Given the strong moves by these top companies, they will have to deliver strong results and positive guidance to push higher in the near-term.