Buy ASML Holding (ASML)
Talk about rebounds.
In 2009 this maker of lithography equipment used to etch computer circuits onto silicon lost 45 cents per ADS (American Depository Share).
In 2010 Standard & Poor’s is projecting that the company will make $2.41 per ADS.
The reason for the rebound in earnings is pretty simple.
The recovery in the markets for PCs and servers (see my post http://jubakpicks.com/2010/04/19/looking-for-tech-stocks-try-the-server-market/ ), and other computer hardware has convinced the makers of chips of every kind to open up their wallets and begin spending on manufacturing equipment again. (Which is why I picked it to add to my portfolio in today’s post http://jubakpicks.com/2010/04/20/go-for-the-growth-and-where-to-find-it-at-a-reasonable-price/ )
ASM Lithography is the top provider of tools used in the most critical semiconductor fabrication process. The in-depth technological expertise required to make these tools helps protect the firm’s strong competitive position. After a tough 2009, ASML is experiencing a strong rebound in business conditions.
ASML is only the third largest supplier of semiconductor manufacturing equipment in the world, but, according to Standard & Poor’s it has a dominant 65% share of the market for lithography equipment. (That may have grown to as much as 80% of the market during the economic downturn. It remains to be seen how much of that extra market share ASML can hang onto.)
Advances in lithography tools, which use a light source to create circuit patterns on a silicon wafer, are the key to packing more and more circuits ever more densely onto smaller and smaller chips. Smaller and more powerful chips are, in turn, the key to staying on top whether you’re a chipmaker such as Intel (INTC) or Taiwan Semiconductor Manufacturing (TSM) or a cell phone or lap top or iPad maker. Lithography tools make up about 15% to 20% of capital spending at chipmakers so it should come as no surprise that when ASML announced its first quarter earnings the company said it was on track in 2010 to beat its record sales of $5.2 billion set in 2007.
“Our customers,” said CFO Peter Wennink in the company’s conference call, “have underinvested in the last two to three years.”
In the highly cyclical semiconductor equipment industry the big question is always how long will the good times last. In the case of ASML I think investors are looking for a cycle that could stretch out into 2014.
The key is a new generation of equipment that is necessary if chip makers are to achieve the 30% to 40% reduction in circuit size that they’ve targeted in their own production plans. ASML started shipping its first platform for that new standard in 2008 (even if not many customers were buying it) and ASML plans to ship re-production units based on a new technology called extreme ultra-violet light (EUV) late this year with full-scale production in 2012. Wall Street analysts say that the new EUV products give ASML roughly a two-year lead on its main rivals Nikon (NINOY.PK) and Canon (CAJ).
As of April 20, I’m adding shares of ASML to Jubak’s Picks with a target price of $42 a share by December 2010.
Full disclosure: I don’t own shares of any company mentioned in this post.
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I’d be grateful if others would kick in and give me their opinion(s) as to buying ASML or INTC or bite the bullet and buy both!
Thanks a bunch!
both. but not as a quick trade.
Seaturtlelady, I bought IBM in January, 2010 at $132. when it broke out to a new high and it is still under water.
In Jim’s post of 4-19-10, “Looking for tech stocks? try the server market”, he states that IBM is the biggest server maker. Yet its been under water since January. I just don’t feel good about tech. Sorry, Jim.
the story about Intel and computer replacements sounds good.
Technologically speaking, ASML is said to have a 2 years advance over his Japanese competitors.
2011 PE: 11.5.
I bought ASML today.
So that it wouldn’t get away, I bought a few ASML Oct. $35 calls – bid/ask spreads are a little wide but good fundamentals are key. …will consider the stock itself if/when it and other Jubak picks settle down. But if AAPL dips significantly tomorrow, I’m all over that!
I can’t say I’m sold on ASML. Tight profit margins, low ROI, and overall just not much to show for what looks like a “moated” business.
This is speculation on my part, but I suspect their margins are getting squeezed by the manufacturers they sell to. I also suspect their “moat” isn’t as solid as the market share numbers would lead you to believe. In other words, their competition is quite real, and keeping their prices low enough to keep ASML from ever being really able to take off.
Buy INTC or TSM if you are looking for a good tech play, but keep away from ASML.
Given that the economy is picking up and corporate spending on Servers which has been on hold will be unleashedsoon, imho it may be a good long term play
Even though european growth is expected to muddle along at ~2% and the US$ hold up short term against the euro, a play like ASTM doesn’t depend much on local economic recovery. In fact, a weaker euro will benefit their exports (which probably doesn’t completely wash the currency effect on the ADR).
The abstraction layer, though, is that they will sell equipment to help build the NEXT generation of servers more than the ones getting INTC’s or anybody else’s current chips. So IBM’s selloff (hopefully temporary, upickem!) is a moot point. As Jim explains, the efficiency enabled by ASML technology is helping to define the future market for high-speed microprocessors. Anybody who wants to play at that table in 2012-14 has to buy in now. Who will ante-up? It will be interesting to find out!
This is an intriguing pick, but not one I want to buy at the moment. I’ll research a little more and wait for it to drop to a little more reasonable price. Plus I’ve got some tech already with INTC and FFIV.
Last comment before letting this drop:
Intel CFO Stacy Smith interviewed by CNN (and making us glad we own INTC):
http://money.cnn.com/video/news/2010/04/20/n_intel_cfo_stacy_smith_q1_earnings.cnnmoney/
Note all of the emphasis on developing and supporting consumer-level and enterprise *mobile* technology! That’s done by lowering the power demands of processors, which translates to less heat generation and longer battery life. …pretty much the same physical process (as best I understand it) that will also revolutionize the large ‘enterprise equipment’ market. That process starts with the lithography equipment. I think this is looking like a brilliant investing idea. We’ll see how it plays out… Meanwhile, what other angles are there to consider?
Off topic – but any thoughts anyone on ‘Marvell Co-Founder’s $8.8 Million Sale’
http://online.barrons.com/article/SB127167135541379301.html?mod=BOL_hpp_oe#articleTabs%3Darticle
Another off topic: Jim recommended the BRF sell. How about IDX? Do we keep riding that higher or is it gonna be done for awhile too?
Jim, this pick reflects your continued optimism about semi manufacturing. However, I like AMAT, the 800lb gorilla in this space, better than ASML which is already near its 5-yr high of about $37/shr. AMAT has lower debt, more cash, a better yield and lots of room to run to its 3-yr high of around $22 (from $14 toay). IMO a better play. What’s your opinion of AMAT here?
AMAT seems a nice play when compared with ASML. I’ve checked ASML fair value in some renowned sites and current price is near or above fair price. Will not buy it..
After Jim added to the Picks portfolio, ASML is having a rough start. Two weeks ago the price was over 35, now it’s sunk below 30. I’ve followed JJ for the past six months. I like his investment philoshophy and his stocks. But…..how low does it have to go before the Jim throws in the towel? I don’t think stocks look too profitable for the Euro zone in the near future. Will ASML be able to weather the storm and still turn a profit for JJ?
Beautiful day to be in this stock on massive raise in guidance. Thanks Jim.