Sell ASML Holding out of Jubak's Picks

05/03/2012 1:32 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Analysts upped their target prices for ASML Holding (ASML), Europe’s biggest semiconductor equipment maker, after the company reported first quarter earnings of 68 cents a share (2 cents above consensus projections) on April 18.

Trouble is, in my opinion, that the new higher targets are for just $55 a share or so and with the stock trading at $50.05 today at 1:15 p.m. New York time I don’t think that’s enough of an upside given the uncertainties in equipment orders from ASML’s biggest customers in the coming quarters. ASML Holding is a member of my Jubak’s’ Picks 12-18 month portfolio http://jubakam.com/portfolios/ . I’ll be selling the shares out of that portfolio today with a 39.4% gain since I added it to the portfolio on April 20, 2010.

You should think of ASML shares as victims of their own success. The stock was up 23.6% for 2012 as of the close on April 27. And ASML shares are up 42% since the $35.85 low on November 25, 2011. And on April 19 the stock hit a 12-year high.

(Please note that ASML is scheduled to pay a dividend of 0.46 euros a share (roughly 60 cents) on May 15 to shareholders of record on May 2. If you sell today, you will still get the dividend.)

It’s not that ASML had bad things to say about the rest of 2012. In fact the company raised its revenue guidance for second quarter.

But the company didn’t give guidance for second quarter earnings on April 18 and I think that reflects a problem for holders of ASML. Because of a steady consolidation in the number of companies making chips—more companies (Apple and Qualcomm to name two) contract their chip making to fewer and fewer big fabs run by the likes of Samsung and Taiwan Semiconductor Manufacturing (TSM). That means the equipment orders to companies like ASML are bigger and lumpier. Taiwan Semiconductor recently increased its capital budget for 2012 to $8 billion to $8.5 billion from $6 billion. That’s certainly good news for companies such as ASML, KLA Tencor (KLAC), or Lam Research (LAM). But given recent news on component shortages from chip consumers such as Apple (AAPL) and Qualcomm (QCOM), it’s also clear that the exact rate of ramp up for new manufacturing lines is uncertain. Working backward that suggests that the exact timing of orders to equipment makers may be uncertain too.

I don’t doubt the reality of the increase in capital spending from chip manufacturers that the sector is seeing. I just worry about the danger of a big order slipping from one quarter to another. That would clobber the shares of a company like ASML or Lam Research and at the current price for ASML shares I just don’t think investors have enough potential reward to take that risk.

I’m much rather revisit this stock in August or September when, even if shares haven’t pulled back in price, we’re likely to have more visibility on 2012 orders. And that would lower the risk in the shares.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of ASML Holding as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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