Technology

Stifel Says Buy Top Semiconductor Equipment Stocks on Market Pullback

Lee Jackson

Published: April 5, 2018 8:05 am

Last Updated: January 12, 2020 1:45 am

While market sell-offs and volatility can be brutal, the good thing for those with a long-term view is that expensive stocks become much more reasonable and can be added to portfolios. Both semiconductors and the semiconductor capital equipment sectors have been red-hot over the past few years, and with good reason. Demand for memory continues to outgrow supply, and that is expected to continue.

A new Stifel research report makes the case that 2019 will be another outstanding year for the semiconductor capital equipment stocks, with memory continuing to drive the sector.

While it is early, the signs look positive, and the Stifel report noted this:

We are taking a preliminary look at 2019 wafer fab equipment (WFE) spending trends and at this early juncture, we believe 2019 will represent another strong spending year, driven once again by continued memory expenditures. Based on a bottoms up approach of potential fab projects, we are currently forecasting 2019 to be flat +/- $3 billion with a bias toward it being up versus down. We believe the recent market (tech) pullback has presented another buying opportunity for the group and we maintain our positive view on the stocks.

Stifel has numerous stocks in the industry rated Buy. Here we focus on four of the highlighted companies.

Applied Materials

This semiconductor capital equipment leader has one of the broadest ranges 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 display side of the business.

Applied Materials remains the top pick at Stifel, and the firm believes the company will continue to outperform in the wafer fab equipment arena.

Investors in Applied Materials are paid a 1.4% dividend. The Stifel price target for the shares is $71, and the Wall Street consensus target is $70.62. The stock closed Wednesday at $55.56 a share.

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.

Many analysts feel that KLA-Tencor is less cyclical than peers with best-in-class returns. The Orbotech purchase adds growth/diversity and sales/earnings per share accretion. Risks for the shares include industry cyclicality, relatively muted growth and limited operating leverage.

Shareholders are paid a solid 2.2% dividend. Stifel has a $139 price objective, while the consensus target price is lower at $127.38. The shares closed trading on Wednesday at $109.25.

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 Stifel analysts like the company’s exposure to memory and feel the continued strength in the industry is a positive for the coming year. They also think fears of capital intensity are overblown and the company will outpace industry WFE trends.

Lam Research shareholders are paid a 1.0% dividend. The $260 Stifel price target compares with a $259.65 consensus price objective. The shares were last seen trading at $201.67 apiece.

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 analysts have felt for some time that the increase in the 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 0.65% dividend. Stifel has set its price target at $133. The posted consensus target is $132.67. The shares closed most recently at $112.30.

Four outstanding stocks to buy, all of which are way down from 52-week highs. The market volatility is a legitimate concern, so it makes sense to scale buy shares rather than go all in. With that in mind, it is very possible that by this time next year, some serious money can be made.