Technology

Stifel Stays Very Positive on Semiconductor Capital Equipment Stocks

Lee Jackson

Published: June 8, 2018 10:05 am

Last Updated: January 11, 2020 10:36 pm

After posting outstanding relative strength for years in line with the semiconductors, some of the top capital equipment companies have pulled back in 2018 and may be offering aggressive accounts some of the best entry points in years. With industry demand for the chip sector expected to remain strong, it’s a solid bet that could translate into positive gains for the equipment makers.

In a Stifel new research report, the semiconductor capital equipment team notes that the firm’s CSI conference is scheduled for next week in Boston, and they expect a very positive tone to emerge as valuations in the industry remain very attractive. The report noted this:

In terms of our semiconductor capital equipment, subsystems and materials coverage, we will have 16 of our covered companies attending the event. From a big picture perspective, we expect the tone to be quite positive on overall spending in 2018 with the promise of continued strength persisting into 2019 as well. We remain favorably biased on the group and believe current valuations represent an attractive entry point into many names.

Five top companies are preferred picks at the firm, and all make sense for aggressive accounts looking to add companies in the space.

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 receive a 1.56% dividend. The Stifel price target for the shares is $75, and the Wall Street consensus target is $67.73. The stock traded early Friday at $50.45.

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 receive a 2.6% dividend. Stifel has a $143 price objective, and the consensus estimate is lower at $133.36. The shares traded at $113.70.

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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.

Shareholders are paid a 2.35% dividend. The $295 Stifel price target compares with the consensus target of $268.62 The shares traded at $186.20.

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 0.72% dividend. Stifel has a $147 price target. The consensus target is $136.43, and shares were last seen at $105.25.

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Ichor

This stock may be off-the-radar for some, but it also could be a beneficiary from the positive news. Ichor Holdings Ltd. (NASDAQ: ICHR) is engaged in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment. The company’s primary offerings include gas and chemical delivery subsystems, collectively known as fluid delivery subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices.

Ichor’s gas delivery subsystems deliver, monitor and control precise quantities of the specialized gases used in semiconductor manufacturing processes, such as etch and deposition. Its chemical delivery subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes, such as chemical-mechanical planarization, electroplating and cleaning.

The Jefferies price target is $37. The consensus target is $40.33, and shares traded at $23.85.

These are five outstanding stocks to buy, all of which are way down from 52-week highs. The recent 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.