After another stellar year for semiconductors and for the capital equipment stocks, many on Wall Street felt that both industries were due for a big-time breather. Given the trade issues and the cyclical nature of the industry, it seemed to make sense. However, commentary from reporting companies in the semiconductor capital equipment space have some rethinking the fourth quarter and 2020, and it could prove to be a much better year than many were anticipating.
In a new Stifel research report, the firm’s lead analyst for semiconductor capital equipment stocks, Patrick Ho, makes the case that based on commentary from Lam Research this week when it presented third-quarter results, not only could 2020 be a solid year for the industry, but it could actually turn into a strong year.
The report noted this in referencing Lam Research management:
We believe management’s commentary, particularly on the NAND flash and Chinese domestic spending fronts, give us more confidence that not only could 2020 represent an “up” year in wafer fabrication equipment or WFE, but potentially a strong recovery year (as in our current +10-20% year-over-year forecast) in spending. We believe management’s comments support our recent NAND flash checks and tracking potential fab build outs in 2020, there is a roadmap for our current WFE outlook or even higher when all is said and done. From a stock’s perspective, while gains in the group clearly reflect a more positive sentiment on 2020, we believe that estimate revisions could still go even higher, particularly as we progress through the year end (2019) and into 2020, when additional color will be provided.
Seven stocks in the capital equipment arena are rated Buy in the report. Here we focused on the four larger-cap industry leaders.
Some on Wall Street feel 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 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, which believes the company will continue to outperform in the wafer fab equipment arena.
Applied Materials investors receive a 1.57% dividend. The Stifel price target on the shares is $57, and the Wall Street consensus target is $48.38. The stock closed Thursday at $55.07, up almost 9% on the day.
This is another strong, large-cap play for investors looking for exposure to capital equipment. 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.
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