Technology

Stifel Pounds the Table to Buy Semiconductor Equipment Sell-Off Now

Lee Jackson

Published: April 19, 2018 8:05 am

Last Updated: January 12, 2020 12:47 am

For the past couple of years, the semiconductors have been red hot, and in lock-step so have the semiconductor capital equipment stocks, and with good reason. As demand for semiconductor performance, capacity and ability have grown, so has the need for the machines and test gear that make them. Throw in the soaring demand for memory, and you have had a perfect storm for both chips and gear.

With some of the biggest names in the industry reporting solid numbers, and reiterating growth going forward, the semiconductor capital equipment stocks are getting hammered, and the analysts at Stifel are pounding the table for investors to buy the sell-off. They noted this in their report when discussing memory:

On the subject of memory spending, there is also the bear sentiment that the industry is heading to an overcapacity or oversupply situation. We maintain our view that the industry is NOT heading to this scenario in either Dynamic random-access memory (DRAM) or NAND flash memory which is a type of non volatile technology that does not require power to retain data. On the DRAM front, we believe DRAM remains healthy, while it continues to broaden its application usage. We also believe the capital intensity costs of new DRAM capacity has significantly increased where the same dollar amounts being spent today will drive only 20-25% annual bit growth, whereas 7-10 years ago, that same dollar spent would drive 40-45% bit growth.

These four top stock remain Buy rated at Stifel and all look attractive for aggressive growth accounts looking to add shares of these companies at a discount.

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.

Applied Materials investors are paid a 1.45% dividend. The Stifel price target for the stock is $71, and the Wall Street consensus target is $70.24. The stock closed Wednesday at $54.73 a share, down over 5% on the day.

Entegris

This small cap play has seen some very solid insider buying over the past year. Entegris Inc. (NASDAQ: ENTG) is a global developer, manufacturer and supplier of micro contamination 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, Advanced Materials Handling and Microcontamination Control.

The analysts remain very positive on the stock and see it as a more defensive play for investors looking to buy the sector but wary of the equipment companies.

Stifel has a $42 price target, while the posted consensus target was last seen at $41.06. The shares closed Wednesday at $37.15, down less than 2% for the day.

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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.

The company posted a very solid earnings beat and raised forward guidance, but the stock was hit hard as second-half guidance implied deceleration, albeit back in line with expected growth levels. The solid earnings and guidance raise was driven by sales and margins. In addition, Lam Research posted the first $1 billion quarter of free-cash-flow services, which was not included in shipments.

Shareholders are paid a 1.01% dividend. The $260 Stifel price target is in line with the posted consensus price objective of $260.45. The shares ended Wednesday trading at $203.77 after falling more than 4% for the day.

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. The Stifel price target is $133. The consensus target is $132.20, and shares were last seen at $116.60, down almost 5% on the day.

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.