Does Semi Equipment Stock Price Escalation Make Sense?

Yesterday was a very good day for chip stocks in general, but particularly so for semiconductor equipment makers like Lam Research LRCX, Applied Materials AMAT and KLA-Tencor KLAC. The three stocks were up a respective 7.2%, 5.0% and 4.7%. Moreover, they were also up 13.2%, 12.8% and 13.1%, respectively over the past week when the S&P 500 moved just 3.1%.

Lam Research

Lam Research has already reported March quarter numbers, and the 1.0% negative surprise on earnings and 5.6% negative surprise on revenue were disappointing, although of course it could have been worse. It pays a dividend that yields 1.73%.

The limited outlook provided for sequential revenue growth across foundry logic and memory (which underinvested in 2019, leading to particular strength this year), negative gross margin impact from capacity challenges, negative impact on other expenses due to safety measures for employees and higher interest expenses related to increased drawings from the revolver. Full-year guidance wasn’t reaffirmed due to increased uncertainties although customers haven’t cut back on orders yet.

However, this was enough to warrant negative revisions to estimates. The Zacks consensus Estimate for the June quarter therefore moved down 37 cents to $4.19 in the last 30 days. Fiscal 2021 (ending June) estimate is down 83 cents to $17.14.

Valuing the shares on the forward twelve months’ earnings we see that they are trading at a 15.7X multiple, which is close to their median value over the past year and trails the S&P 500 average of 21.2X, which is at the high end of its range over the past year.

So the increase in the share price appears to be a correction from the lows to which it dropped in the third week of March.

KLA-Tencor

KLA beat the Zacks Consensus Estimate by 5.1% on earnings and 0.6% on sales, attributed to bot strong demand and good execution. The company has a significant chunk of its operations and employees in China, which appears to have contained the virus very efficiently.

The revenue outlook is slightly below March quarter levels at the midpoint but substantially higher than the year-ago number at the midpoint. Despite higher COGS and operating expenses, the EPS is also expected to remain strong as demand remains strong.

The company’s earnings estimate for the current quarter is down 5 cents to $2.35 although the estimate for 2021 (ending June) is up 12 cents.

KLAC, which typically trades at a discount to the S&P 500, is trading at a P/E that’s toward the high end of its range over the past year. So investors appear to be reacting to the company’s steadier performance in the pandemic filled world as well as the broader market scenario.

Applied Materials

Applied Materials is expected to report results on May 14. It earlier withdrew its guidance for this quarter citing pandemic-related uncertainties.

Soon after that Stifel analyst Patrick Ho put out a note saying that the chip sector, including both chip and equipment makers, was in chaos because of supply chain issues, although Lam Research, KLA Tencor and Applied Materials could be accumulated as defensive plays. He also recommended Entegris ENTG and MKS Instruments MKSI.

The Zacks Consenus Estimate for April quarter dropped 12 cents to 92 cents. The estimate for 2020 (ending October) dropped 40 cents to $3.74 since then.

Applied Materials is also trading close to the high end of its range over the past year.

Bottom Line

Investors have been enthusiastic about these shares because they too appreciate their defensive nature. While that may be the reason for their performance of late, the fact that Intel INTC is in talks with the government to bring some manufacturing to the U.S. and Taiwan Semiconductor Manufacturing TSM is reportedly thinking of building a factory in some international market is additional good news as it is likely to boost demand.

 

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