Intel's Focus on 45 nm: KLA, MEMC and Novellus To Benefit

by: Eric Savitz

As one of the biggest spenders in the chip industry - and a trend-setter - the semiconductor equipment industry looks at Intel’s (NASDAQ:INTC) quarterly reports, skips over the income statement and looks for the forecast for capital spending. In its fourth-quarter report Tuesday night, Intel said it expects to spend $5.5 billion on capital equipment in 2007, down about 5% from 2006, but more or less what the Street had expected.

Intel said it expects significantly higher spending for the ramp of 45 nm process technology, “more than offset by savings in a variety of areas.” Some analysts were disappointed by the total expected spending budget, but others saw a glimmer of hope in the focus on 45 nm.

Patrick Ho, an analyst with Stifel Nicloaus, says Intel’s $5.8 billion in capital spending in 2006 was below the $6.2 billion it had previously projected; and he says the $5.5 billion it expects to spend this year is well below the $6 billion to $6.2 billion he had expected.

“We believe that Intel’s somewhat conservative plans could forebode additional cap ex reductions by other chip makers, which would support our belief that 2007 industry cap ex may reflect some near-term cautiousness due to current industry conditions,” he asserted in a research note.

Citigroup’s Timothy Arcuri asserts that Intel’s spending plans for this year suggest it’s “capital intensity” - that is, cap ex as a percentage of sales, or as a percentage of cost of goods sold - “will approach levels last seen before INTC’s last two big investment boom periods,” in 2000-2001, and in 2005-2006.

“Barring any large deviation from historical trends, this data would also appear to suggest that the next uptick in INTC’s capex cycle won’t likely be seen until 2009,” he writes.

That said, Arcuri does say that the company most leveraged to Intel’s plans on 45 nm technology is KLA-Tencor (NASDAQ:KLAC); while cautious on the sector, Arcuri says he would be an “aggressive buyer” of KLAC; he says other beneficiaries of Intel’s focus on 45 nm this year include MEMC (WFR) and Novellus (NASDAQ:NVLS-OLD).

Stephen Chin, an analyst at UBS, estimates that both KLA and Novellus get close to 10% of their revenue from Intel; he also says Varian Semiconductor (NASDAQ:VSEA) won Intel’s 45 nm high current ion implanter business for the first time in the fourth quarter. Chin says Applied Mateirals (NASDAQ:AMAT) has the most dollar exposure to Intel’s spending plans.

Satya Kumar, of Credit Suisse, asserts that “equipment orders from Intel have been tracking more or less flat for [semiconductor capital equipment] companies.” He notes that Intel’s capital spending plans this year should skew more to equipment and less to other areas, like buildings. “We’d argue the datapoint is at worst a neutral if not modestly positive.” He sees the best play on Intel’s spending plans as KLA, with Novellus and Varian also having “good leverage to Intel cap ex.”

Jay Deahna, of J.P.Morgan, contends the equipment stocks offer the best way to play the war between Intel and Advanced Micro Devices (NASDAQ:AMD).

“Regardless of who wins the multi-core CPU war, equipment suppliers are likely to benefit due to the trend of increased average die sizes, lower associated yields, and less efficient use of the silicon wafer due to increased mismatch between the larger due and the round wafer edge,” he writes. “This phenomenon translates to lower device output per capital spending dollar and a higher relative level of capital intensity for mainstream microprocessors, which is a positive for equipment suppliers and sustained levels of capital spending.”

In yesterday’s trading:

  • KLA was up 78 cents to $51.49.
  • Novellus was up 41 cents to $32.66.
  • MEMC was up 20 cents at $45.25.
  • Varian was up 14 cents at $46.31.
  • Applied Materials was down 2 cents at $19.46.