ASML: a Victim of Its Own Success

05/03/2012 2:11 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The chipmaker continues to profit on fast-growing demand, but shares have run up so fast this year that staying in would likely mean diminishing returns, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

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, 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 has been a member of my Jubak’s’ Picks 12-18 month portfolio. However, I’ll be selling the shares out of that portfolio today, with a 39.4% gain since I added it on April 20, 2010.

(Please note that ASML is scheduled to pay a dividend of 46 euro cents 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.)

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.

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 earnings guidance for the second quarter 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 (AAPL) and Qualcomm (QCOM) 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 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 and Qualcomm, 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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

Related Articles on STOCKS