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I’ve been waiting to see what ASML Holdings (Nasdaq: ASML) competitor Veeco Instruments (Nasdaq: VECO) would report today, July 26. ASML Holdings reported on July 14, the same day as Intel (Nasdaq: INTC), and I didn’t want to up my target for ASML Holdings simply out of enthusiasm for Intel’s performance. (For more on Intel’s earnings, see this post.)

Two weeks later however, Veeco confirmed strength in the chip manufacturing sector. The company announced earnings that beat Wall Street projections by 18 cents a share and revenue projections by 8%, and then raised guidance for the third quarter.

That confirms the July 14 numbers out of ASML Holdings: Earnings 17% above projections for the second quarter, revenue 8% above expectations, and guidance for fiscal 2010 sales to grow 10% to 15% above historical peak sales. Orders for ASML Holdings lithography equipment, used to etch circuits onto silicon, were 1.18 billion euro in the quarter. That drove the company’s order backlog to 2.4 billion euro as of the end of June.

ASML Holdings was confident enough about growth to predict that it will continue at current levels into 2011. “When we look at the total picture, 2011 bodes very well for ASML,” chief financial officer Peter Wennink said. “Because it’s not a little hump that we’re currently seeing. We are seeing some structural drivers for growth in this industry.” (See this post on why guidance counts more than earnings do right now.)

v Increased sales are being driven by the continued move of memory chip (DRAM) makers to 40-nanometer production technology and new spending from chip foundries as they catch up with underinvestment in production machinery during the global financial crisis. This part of the silicon economy is adding new 65-nanometer manufacturing capacity and also pushing down into the next generation of 40-nanometer production. The increased efficiency and power that comes with 40-nanometer technology is also leading to the retirement of old capacity. That too increases orders for ASML Holdings.

ASML Holdings has introduced its new generation of lithography machines based on extreme ultraviolet (EUV) this year just in time to catch the eye of manufacturers looking for a production edge. The pre-production units of that technology are sampling now with full commercial production set for 2012. Wall Street analysts say that the new EUV products give ASML roughly a two-year lead on its main rivals Nikon (OTC: NINOY) and Canon (NYSE: CAJ).

The stock is up roughly 15% from its June 29 low. As of July 26, I’m raising my target price on ASML Holdings to $43 a share by May 2011 from the previous target of $42 by December 2010.

Full disclosure: I don’t own shares of any stock mentioned in this post in my personal portfolio.

Tickers Mentioned: ASML, INCT, VECO, NINOY, CAJ

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