Deutsche Bank Raises Price Targets on Red-Hot Semiconductor Equipment Stocks

Technology

Published: January 24, 2017 10:05 am

Last Updated: January 12, 2020 3:36 pm

One of the solid industries in technology last year was the semiconductor capital equipment stocks, and with good reason. Many of the chip companies are expanding their presence far beyond just personal computers and laptops, and demand all over the world is increasing. While this year may not have the same big upside, some of the top firms on Wall Street are still positive on the subsector.

In a new research report, Deutsche Bank is in the camp that believes that 2017 could be solid and sees the potential for 3% to 5% year-over-year wafer fab equipment spending. The firm also notes that trading at 13 to 15 times estimated 2017 earnings, the multiples continue to remain very attractive.

Deutsche Bank raised price target on four such stocks, and three are rated Buy.

Applied Materials

This semiconductor capital equipment leader has moved up nicely over the past year. 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 the semiconductor side of the business, but also from larger, higher resolution and flexible screens on the display side of the business. Despite reporting solid first-quarter earnings that were above consensus, and guidance that was in line with expectations, the stock is still very reasonably priced. It may very well be one of the best technology values available for investors today. Some Wall Street analysts see continued FinFET capacity expansion (10nm/14nm/16nm) and transition to 3D NAND, with DRAM spending remaining strong next year.

Last year the company announced a new $2 billion share buyback program, which came on the heels of a completed $3 billion program. Some on Wall Street see the purchase plan as being approximately 8% accretive to earnings per share.

Applied Materials investors are paid a 1.2% dividend. The Deutsche Bank price target for the stock was raised to $36 from $33. The Wall Street consensus price target is $36.52. Shares closed Monday at $33.75 apiece.

Lam Research

This company 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.

Despite so-so foundry and logic spending over the past year, many on Wall Street think that Lam will also continue to benefit from technology transitions such as FinFET, 3D NAND, multi patterning and advanced packaging in 2016 and beyond. Many analysts believe it is the “cleanest” semi-cap story benefiting from cyclical tailwind, SAM expansion and share gains.

The Deutsche Bank analysts feel the company is most likely to provide upside earnings surprises this year, given the company’s big exposure to memory and the etch/deposition areas of the sector. Their report noted:

In addition, we believe Lam Research is the most likely company in our coverage to increase capital returns (most likely in the form of share repurchases) should there be a tax reform under the Trump administration that favors foreign cash repatriation.

Shareholders are paid a 1.6% dividend. Deutsche Bank raised its price target to $125 from $115, and the consensus target is listed at $118.83. The shares closed most recently a $112.77.

Teradyne

This lesser known industry leader could also have solid upside potential. Teradyne Inc. (NYSE: TER) provides automatic test equipment serving semiconductors, printed circuit board assemblies and other segments, such as automotive and broadband. Its products deliver a competitive advantage to semiconductor, electronics, automotive and network systems companies. Teradyne operates in three segments: Semiconductor Test Systems, Assembly Test Systems and Other Test Systems.

Last month the company completed a $400 million convertible bond offering. Many on Wall Street saw this as a positive, and feel the company will use the proceeds to help stock buyback plans. Its board approved a new $500 million share repurchase program, which is a positive for shareholders.

Shareholders are paid a small 0.92% dividend. The Deutsche Bank price target went from $25 to $28, and it compares to the consensus target of $25.25. Shares closed Monday at $26.02.

KLA-Tencor

Wall Street has again been focusing on the core strengths of this semiconductor capital equipment giant since the deal with Lam Research fell through last fall. 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.

Investors are paid a tidy 2.63% dividend. Deutsche Bank has a Hold rating on the shares but raised its price objective to $78 from $75. The consensus target is $79.70, but note that the shares closed trading on Monday at $82.10.

The Deutsche Bank stocks rated Buy all make good sense for aggressive growth accounts. However, given the stretched valuations in the overall market, investors may want to scale in some money now and see if we don’t get a pullback.