ASML Is the Semicap for Patient Investors - Barron's

Like so many other industries today, semiconductor stocks are struggling and capital-equipment suppliers are feeling their pain. Semicap leaders Applied Materials (AMAT), ASML Holding (ASML) and KLA-Tencor (KLAC) have seen their shares drop to multi-year lows. But for ASML, argues Barron's Bill Alpert, this presents an opportunity for patient investors who could ultimately see the stock double as the economy recovers.

Plenty of cash and a lean cost structure should help ASML come through the economic downturn relatively unscathed. If chip demand returns to pre-recession levels in 2010, the company's sales could grow 20% after a sluggish 2009, and ASML should remain profitable even if sales drop 25% next year. Plus, a weak euro makes ASML's gear a better bargain than yen-based rivals. As the economy begins to pick up, ASML's stock could double from its current $16.44/share.

Investors will need to keep an eye on the long-term, however, because the short-term semiconductor business isn't looking too good. Around 2/3 of ASML's sales are from memory-chip makers, but a glut has led to huge losses for producers of DRAM and flash, important memory components in computers and hand-held gadgets. Contract manufacturers aren't rushing to expand capacity since the recession has hurt demand for electronic products, and loans for new capital equipment will be difficult to come by. "Everyone is hitting the brakes," explains an ASML spokesman.

Some chip makers are pushing for ASML's newest scanners. ASML has previously gained marketshare from rivals on high-end scanners, and a new machine rolled out before the competition can often pay for itself in 3-6 months. ASML has also beat competition by investing heavily in research, and has Europe's highest level of R&D per employee.

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• ASML (ASML): Q3 EPS of $0.17 beats by $0.01. Revenue of $696M (-25.5%) vs. $751M. (PR)
• Last week, ASML was added to the NASDAQ Q-50 Index, effective December 22, 2008. The Index is designed to track the performance of the 50 securities that are next in line to replace the securities currently included in the NASDAQ-100 Index.