A couple of weeks ago I had an extended exchange with a friend of mine who is an oil man in Oklahoma...
Chip Boom Should Last a While Longer
02/03/2011 3:50 pm EST
Samsung Electronics, perhaps Intel’s biggest competitor, and Taiwan Semiconductor Manufacturing (NYSE: TSM), an Intel partner as well as a manufacturer for some Intel competitors, have announced big increases in their capital-spending plans in the last few days. They’re jockeying to keep pace with Intel and Advanced Micro Devices (NYSE: AMD) spinoff Globalfoundaries in the market-share battle for the chips that will run tablet computers and smart phones.
Spending on semiconductor manufacturing equipment will climb at least 10% in 2011 to $42.2 billion from $38.4 billion spent in 2010, according to technology research house Gartner. The increase is especially stunning because Gartner had been projecting a 1% drop for 2011.
Back on January 13, Intel announced that it would spend $9.3 billion on new plants and equipment this year, a 79% jump from 2010 spending. Globalfoundaries has said it would double spending to $5.4 billion.
On January 26, Taiwan Semiconductor Manufacturing reported that would increase capital spending by 30% in 2011 to $7.8 billion from a record $5.94 billion in 2010. On January 28, Samsung announced that total 2011 capital spending would climb to $20.7 billion from a total $19.4 billion for 2010. Of that, $9.2 billion will go into the company’s semiconductor business.
ASML is my favorite stock in the sector. On January 19, the company announced fourth-quarter earnings of EUR 0.94, EUR 0.21 above analyst projections. Revenue climbed 161%, beating analyst projections by EUR 200 million. Gross margins climbed to 45% in the quarter from 43.6% in the previous quarter. The Dutch company booked EUR 2 billion in orders during the quarter to finish the year with a EUR 3.9 billion backlog.
For the first quarter of 2011, ASML raised revenue guidance to EUR 1.4 billion. The consensus projection had been EUR 1.32 billion. The company also said that it would pay a EUR 0.40 a share dividend for 2010, up from the EUR 0.20 dividend paid for 2009.
On Wall Street’s projected earnings for 2011, the stock trades at a price-to-earnings ratio of just 11.7. Price-to-earnings ratios are traditionally very low for chip-equipment makers because the industry goes so quickly from boom to bust. But with spending plans moving higher in 2011, ASML and its peers have at least another year of boom ahead, and I’d think it’s reasonable to look for the stock to trade at its current price-to-earnings ratio of 13 on 2011 earnings by December.
As of February 3, I’m raising my target price to $52 a share by May 2011.
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 (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Applied Materials, ASML Holding, Intel, and Taiwan Semiconductor Manufacturing 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 here.
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