Technology

Semiconductor Capital Equipment Stocks Going Higher: 5 to Buy Now

Lee Jackson

Published: September 8, 2017 8:25 am

Last Updated: January 12, 2020 8:23 am

Investors in both semiconductors and the industry’s capital equipment business have been on a long and outstanding run. With all the silos of the capital equipment arena still looking very positive for the rest of 2017 and next year, many Wall Street analysts remain positive. Most feel that spending for wafer fab equipment (WFE) still looks strong, demand for 3D NAND remains robust and while DRAM growth may be flat year over year, the supply/demand situation remains healthy.

A new research report from Patrick Ho, the outstanding analyst at Stifel, and his team notes that while stock prices are elevated, valuations are still fair. The report noted this:

From a stock’s perspective, we were not surprised by the sideways trading in the names since Semicon West, where we saw a decline during earnings season in July and a recovery in mid-to-late August. We believe many names, particularly on the large cap end, remain very attractive on a valuation basis when using 2018 estimates. If anything, we would not be surprised to see some upside to our current 2018 WFE outlook and this would drive further upside to our estimates (and make valuations even more attractive.

With the possibility of a continued rally into year-end, five stocks are especially attractive. All are rated Buy at Stifel.

Applied Materials

Some on Wall Street feel this semiconductor capital equipment leader 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 company’s third-quarter earnings rose sharply and beat Wall Street expectations. Revenue increased 33% from the year-ago period.

Shareholders receive a 0.9% dividend. The Stifel price target for the stock is $61, while the Wall Street consensus price target is $55.02. The shares closed Thursday at $45.22.

KLA-Tencor

This is another strong large cap play for investors. KLA-Tencor Corp. (NASDAQ: KLAC) designs, manufactures and markets process control and yield management solutions worldwide.

It offers chip manufacturing products, such as front-end defect inspection tools, defect review systems, advanced packaging process control systems, metrology solutions, in-situ process monitoring products and lithography software; wafer manufacturing products comprising surface and defect inspection, wafer geometry and nanotopography metrology and data management; and reticle manufacturing products, such as defect inspection and pattern placement metrology products.

The company also provides light emitting diode (LED), power device and compound semiconductor manufacturing products consisting of patterned wafer inspection, defect inspection, surface metrology and data management products; thin-film head metrology and inspection, virtual lithography, in-situ process monitoring, transparent and metal substrate inspection and data management products for data storage media/head manufacturing; and stylus and optical profiling and optical inspection products for microelectromechanical systems manufacturing, as well as products for general purpose/lab applications.

The analyst cites the company’s strong execution, served available market (SAM) expansion and an industry-leading financial model. Analysts also see continued financial outperformance on strong market share and SAM expansion.

Shareholders are paid a solid 2.5% dividend. The $106 Stifel price objective is a bit higher than the consensus target of $105. The shares closed Thursday at $95.32.

Lam Research

This remains one of the top chip equipment picks across Wall Street. Lam Research Corp. (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 market, driven by a strong focus on technology inflection spending over the next few years.

The company beat Wall Street’s June-quarter sales and earnings targets and guided analysts higher for the September quarter.

Shareholders are paid a 1.07% dividend. Stifel has a $215 price target, which compares with a consensus price objective of $191.11. The shares closed Thursday at $168.59.

MKS Instruments

This stock flies somewhat under the radar but offers solid upside. MKS Instruments Inc. (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.

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.

Stifel feels the increase in Applied Material’s display equipment business will have positive implications for MKS as it supplies 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 lineup.

MKS shareholders receive a 0.85% dividend. Stifel has set its price target at $98, and the consensus target is $94.57. Shares closed Thursday at $84.90.

Teradyne

This lesser known industry leader could also have solid upside potential. Teradyne Inc. (NYSE: TER) provides automatic test equipment serving semiconductors, printed circuit board assemblies and other segments, such as automotive and broadband. 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 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 back its stock.

Shareholders receive just a 0.8% dividend. The Stifel price target is $39. The posted consensus target is $38.33, and shares closed Thursday at $35.65.

Given the strong moves by these top companies, they will have to continue to deliver strong results and positive guidance to push higher the rest of the year and in 2018. That said, with the industry metrics still very positive, the odds look good.