The semiconductor equipment race is heating up even faster than I laid out in my January 14 post on Intel http://jubakpicks.com/2011/01/18/the-chip-war-thats-bad-for-intel-is-good-for-the-shares-of-chip-equipment-makers/
Samsung Electronics, perhaps Intel’s biggest competitor at the moment, and Taiwan Semiconductor Manufacturing (TSM), an Intel partner as well as a manufacturer for some Intel competitors, have announced big increases in their capital spending plans in the last few days as they move to keep pace with Intel and Advanced Micro Devices (AMD) spinoff Globalfoundaries in the battle to win share in the market for the chips that will run tablet computers and smart phones.
Spending on semiconductor manufacturing equipment will climb at least 10% in 2011 to $42.2 billion from $38.4 billion spent in 2010, according to technology research house Gartner. The increase is especially stunning because until these new numbers Gartner had been projecting a 1% drop in capital spending on equipment for 2011.
Back on January 13 Intel announced that it would spend $9.3 billion on new plants and equipment this year, a 79% jump from 2010 spending. Globalfoundaries has said it will double spending to $5.4 billion.
On January 26 Taiwan Semiconductor Manufacturing reported that will increase capital spending by 30% in 2011 to $7.8 billion from a record $5.94 in spending in 2010. On January 28 Samsung Electronics announced that total 2011 capital spending will climb to $20.7 billion from a total $19.4 billion for 2010. Of that $9.2 billion will go into the company’s semiconductor business.
The trend should be enough to help the shares of chip equipment makers that include Applied Materials (AMAT) and ASML Holdings rally for another year.
ASML is my favorite stock in the sector. On January 19 the company announced fourth quarter earnings of euro 0.94, euro 0.21 above analyst projections. Revenue climbed 161%, beating analyst projections by euro 200 million. Gross margins climbed to 45% in the quarter from 43.6% in the previous quarter. The Dutch company booked euro 2 billion in orders during the quarter to finish the year with a euro 3.9 billion backlog.
For the first quarter of 2011 ASML Holding raised revenue guidance to euro 1.4 billion. The consensus projection had been euro 1.32 billion. The company also said that it would pay a euro 0.40 a share dividend for 2010, up from the euro 0.20 dividend paid for 2009.
On Wall Street’s projected earnings for 2011, the stock trades at a price to earnings ratio of just 11.7. Price-to-earnings ratios are traditionally very low for chip equipment makers because the industry goes so quickly from boom to bust. But with spending plans moving higher in 2011 ASML Holdings and its peers have at least another year of boom ahead and I’d think it’s reasonable to look for the stock to trade at its current price-to-earnings ratio of 13 on 2011 earnings by December.
As of February 3 I’m raising my target price to $52 a share by May 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Applied Materials, ASML Holding, Intel, and Taiwan Semiconductor Manufacturing as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/