Investors in both semiconductors and the industry’s capital equipment business have been on a long and outstanding run. With all the silos of the capital equipment arena still looking very positive for the rest of 2017 and next year, many Wall Street analysts remain positive. Most feel that spending for wafer fab equipment (WFE) still looks strong, demand for 3D NAND remains robust and while DRAM growth may be flat year over year, the supply/demand situation remains healthy.
A new research report from Patrick Ho, the outstanding analyst at Stifel, and his team notes that while stock prices are elevated, valuations are still fair. The report noted this:
From a stock’s perspective, we were not surprised by the sideways trading in the names since Semicon West, where we saw a decline during earnings season in July and a recovery in mid-to-late August. We believe many names, particularly on the large cap end, remain very attractive on a valuation basis when using 2018 estimates. If anything, we would not be surprised to see some upside to our current 2018 WFE outlook and this would drive further upside to our estimates (and make valuations even more attractive.
With the possibility of a continued rally into year-end, five stocks are especially attractive. All are rated Buy at Stifel.
Some on Wall Street feel this semiconductor capital equipment leader has the broadest range 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 company’s third-quarter earnings rose sharply and beat Wall Street expectations. Revenue increased 33% from the year-ago period.
Shareholders receive a 0.9% dividend. The Stifel price target for the stock is $61, while the Wall Street consensus price target is $55.02. The shares closed Thursday at $45.22.
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.
The analyst cites the company’s strong execution, served available market (SAM) expansion and an industry-leading financial model. Analysts also see continued financial outperformance on strong market share and SAM expansion.
Shareholders are paid a solid 2.5% dividend. The $106 Stifel price objective is a bit higher than the consensus target of $105. The shares closed Thursday at $95.32.