Stifel Stays Very Positive on Semiconductor Capital Equipment Stocks

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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.