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Investors who have been looking for a confirmation of the semiconductor industry rebound got it from Intel (NASDAQ:INTC) on Wednesday afternoon as the company reported second quarter results that beat analysts’ estimates on both the top and bottom lines.

Intel’s results further suggest that Novellus' (NASDAQ:NVLS) disappointing guidance last week was more company-specific than an industry-wide issue. But what should cheer investors the most is Intel’s announcement to up its capital spending by $500 billion, confirming the company’s previous plans to increase capital spending by 73% to $9 billion in 2011. When put together with a similar announcement of another semiconductor company, Taiwan Semiconductor (NYSE:TSM), to up capital spending by 30 percent to $7.8 billion, Intel’s announcement should be music to the ears of semiconductor equipment makers that have been threading water for almost a decade.

Semiconductor equipment leaders like Applied Materials (AMAT) have been trading 40 percent below their 2000 high (adjusted for a 2002 stock split), Teradyne (TER) near 80 percent, Novellus Systems 40 percent, and KLA-Tencor (KLAC) 35 percent; and they all command low PEs, in the single to low-teen digits.

Company

Recent Price

Forward PE

Applied Materials

$12.88

10.81

KLA-Tencor

42.68

10.64

Kulicke and Sofa Industries (NASDAQ:KLIC)

9.88

6.32

Novellus Systems

32.46

10.12

Teradyne

14.10

9.04

Lam Research (NASDAQ:LRCX)

42.96

10.09

The semiconductor industry’s rebound is further confirmed by a Gartner report showing that semiconductor equipment spending grew by 131 percent in 2010. Rising semiconductor equipment spending is further supported by industry fundamentals:

  • Tight capacity. The capacity utilization rate among semiconductor producers is over 90%, a level that typically results in large increases in capital spending.
  • A replacement cycle and new manufacturing technology. Most semiconductor making equipment is 10 years old, too long for an industry in the forefront of innovation. A move toward 22-nanometer technology will drive industry-wide growth.
  • New product cycle. The IT industry is in the middle of a new revolution propelled by handheld devices like smart phones and iPads (NASDAQ:AAPL) that require a new generation of semiconductors, especially in flash memory devices, that must be produced with new equipment. Companies like AMAT that have branched out into solar energy may further benefit from the surge in alternative energy technologies.
  • Favorable US tax legislation is expected to accelerate IT capital spending, and tip the balance between old and new equipment.
  • Binding entry barriers make the industry an oligopoly that allows major players to maintain pricing power.

Patience should eventually pay off for investors in semiconductor industry.

Disclosure: I am long INTC, AMAT.

Source: Intel's Capital Spending to Boost Semiconductor Equipment Makers