Memory to Stay Very Strong in 2018: 5 Semiconductor Equipment Buys

For those involved in the semiconductor space in 2017, it has been a very good year. While 2018 may not be quite as impressive, there is every reason to be optimistic. The most positive aspect is that spending looks to be strong for the fourth quarter and could very well spill over into next year, and while valuations have jumped, some recent declines in stock prices are making entry levels more appetizing.

In a new research report, Stifel remains very positive on the semiconductor capital equipment stocks, and with good reason. The demand for dynamic random access memory (DRAM) is driving spending, which could in turn drive upside to the final 2017 results. The report explained why the firm is bullish:

With the quarter (and year) coming to an end, our most recent channel checks suggest a strong conclusion in spending, which could drive upside to the equipment group when all is said and done. We believe the biggest incremental upside driver is spending on the memory end, notably in DRAM. We also believe 3D NAND orders have once again picked up, setting up shipments and tool deliveries into the first half of 2018. From a fundamental and stocks perspective, we continue to be bullish on the outlook for 2018 and believe the recent market pullback represents a buying opportunity for investors.

These five top companies are rated Buy at Stifel, and all are outstanding additions to aggressive growth accounts.

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.

Many analysts expect that the industry NAND supply will be up a high 30% in calendar 2017 and approaching near 50% in calendar 2018 as well, with underlying demand drivers remaining solid. Continued supply growth and technology transitions should bode well for semi-cap companies.

Applied Materials shareholders are paid a small 0.77% dividend. The Stifel price target for the shares is $66, and the Wall Street consensus target is $67.40. The stock closed Friday at $52.06 a share.

FormFactor

This small-cap company could offer large returns for aggressive investors. FormFactor Inc. (NASDAQ: FORM) helps semiconductor manufacturers test the integrated circuits (ICs) that power consumer mobile devices, as well as computing, automotive and other applications.

The company is one of the world’s leading providers of essential wafer test technologies and expertise, with an extensive portfolio of high-performance probe cards for DRAM, flash and system on chip devices. Customers use FormFactor’s products and services to lower overall production costs, improve their yields and enable complex next-generation ICs.

Last year the semiconductor probe card manufacturer made a bold bet by shelling out more than $350 million to acquire Cascade Microtech, one of its primary competitors. That move nearly doubled the size of its business and promised to make the company stronger than ever.

Stifel has a $21 price target, and the consensus target is $20.18. The shares ended last Friday at $16.40.

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.

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

Shareholders are paid a solid 2.5% dividend. The $121 Stifel price objective compares with the consensus target price of $113.50. Shares closed Friday at $109.32.

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.

Shareholders receive a 1.07% dividend. Stifel has a whopping $235 price target. The consensus price objective is $226.65, and shares closed on Friday at $186.69.

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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 0.75% dividend. The Stifel price target is $116. The consensus target is $117.83, and shares were last seen trading at $96.45.

The fourth quarter pullback in all these top companies provides investors with much better entry levels. It may make sense to buy partial positions here and see if there is any more year-end profit taking.