ASML is their top large cap pick and to paraphrase Chris Danely, it is in the front seat of their mini van. Firm sees sustained competitive advantage, share gain, and margin expansion, and they believe investors should be buying the stock aggressively now or risk missing it for a potentially long time. Firm believes the stock is at, or very close to solid valuation support, memory-related weakness is minimal, and consensus is about a year behind the curve relative to their EPS estimates.
Due to general market weakness, the likelihood of roughly 60 unit orders in C1Q07 and C2Q07 vs. 84 in C4Q06, and concern that Nikon is closer than previously expected in immersion created the recent dip in ASML shares, in firm's view. Recent comments suggest a better immersion unit split for Nikon vs. ASML at Toshiba. This has created fear that Nikon is closer to ASML in immersion than previously expected. Firm sees Toshiba as a huge win for ASML as it represents share gain in Japan that has been traditionally off limits (at a very tough customer). Nikon will remain a strong competitor, but they think ASML is poised to grow its market share throughout the immersion era based on solid positions at its core customers plus increased penetration in Japan and at Intel. As such, the company's overall market share should trend up to the 65%+ range over the next few years. ASML's unit orders should dip in 1Q, but TSMC is back with 90nm orders now and 65nm to follow while Intel is preparing for a sharp 2H07 unit ramp. Bottom line, most of the 1H order drop is low ASP i-Line tools and the value of orders should remain strong on an increase in leading edge dry ARF and 1900i orders.
Firm expects a new order cycle and traditional seasonality to drive substantial upside in equipment stocks in C2H07 as we have stated repeatedly since January. Also, they continue to recommend buying the low end of a likely first half 2007 trading range, which has been largely defined in our view.
Notablecalls: ASML seems to be trading relatively flat in the Europe. Buying the shares near the yesterday's close should provide oppty to unload them for 25-50c profits later today as JP Morgan's comments are strong enough to create buying interest.