Digging into the earnings results Wednesday from chip equipment vendor ASML Holdings N.V. (ASMLD), J.P. Morgan chip equipment analyst Jay Deahna says the company’s 115% surge in orders in the quarter ending Sept. 30 are pointing to an upturn in the chip equipment business.
“With the increase in third quarter orders and company guidance of a quarter over quarter increase in fourth quarter units, ASML is calling an up-cycle in equipment orders,” writes Deahna. He thinks his peers on the Street still don’t get it. “On [capital expenditures], the sell-side consensus in the US for '08 is down 7% while we believe the buy-side consensus/psychological state is lower in the down 10% range or worse,” writes Deahna. “We are amazed at how much '08 capex expectations are based on current views,” he says.
“Given strong IC unit trends, decent end-market drivers for chips, positive momentum in long lead-time leading indicator lithography orders, and rampant pessimism on the Street, we expect reality to be better than current expectations,” concludes Deahna.
Deahna notes that some contract chip makers are nearing the exhaustion of their existing chip-making capacity, in particular Taiwan Semiconductor Manufacturing (NYSE:TSM), the largest contract chip-maker in the world. “TSMC is at more than 90% utilization in its 300mm fabs in fourth quarter,” notes Deahna, and he expects the company will start ordering equipment “as soon as it sees some indications of Christmas demand,” opines Deahna. ASML is Deahna’s top pick in equipment makers, and he has a 31 Euro price target on the ordinary shares of the Veldhoven, Netherlands-based company, which would be 28% above ASML’s close Friday of 24.26 Euros.
ASMLD 1-yr chart: