Chip equipment companies are on the upswing
By Lee Patterson, Forbes ASAP
emiconductor equipment companies are starting to see some potential for long-term growth. After being in the dumps for months and hitting a real low point in October, share prices in chip equipment stocks have risen significantly. Major players such as Applied Materials (nasdaq: AMAT) and KLA Tencor (nasdaq: KLAC) have seen their share prices more than triple since last fall.
Mark FitzGerald, a semiconductor capital equipment analyst with Merrill Lynch, says there are two trends driving the market: One is "the transition [from aluminum wiring] to copper." The other, he says, are the advances in lithography, a method used to print a chip's circuit pattern on to a silicon wafer. FitzGerald predicts that "[Lithography] will be one of the fastest growing segments in the industry over the next couple of years." When asked about the inevitable approach of the physical limitations of chips getting smaller and smaller, he says we won't hit the limit until 2015 and "a lot of things will happen in lithography between now and then."
One of his picks in this market is San Diego-based Cymer (nasdaq: CYMI), a supplier of one of the key laser technologies used by semiconductor companies to make chips smaller. "[Cymer] is a dominant market supplier," he explains. "It sells to all the major lithography tool makers, including ASM and Nikon." FitzGerald expects it to maintain 70% to 80% market share over the next couple of years. He expects it to hit a 12-month target price of $35. On Tuesday, June 15 the closing price was $23.56.
FitzGerald believes Novellus Systems (nasdaq: NVLS) is in the best position to cash in on the industry's move to copper wiring. The San Jose-based company was an early proponent of the transition to copper, and it helped pioneer some of the technologies associated with the new process. "Sales of copper tools will account for 30% to 35% of [Novellus1] total revenues in 2000," says FitzGerald. Competitor Applied Materials' copper tools sales will only account for 10% to 15% of its total revenues, he added. FitzGerald estimates that Novellus' revenues could grow by 50% next year based on its new products. He forecasts a 12-month target share price of $100. The stock closed at $65.50 on Tuesday.
San Jose-based KLA-Tencor (nasdaq: KLAC) is rated as a buy short term and long term. This company has reaped the benefits from the recovery in the semiconductor capital equipment market, according to FitzGerald. "It's become one of the franchise names in the industry," he says. He believes KLA's revenues should reach $800 million by 2000, up from an estimated $500 million this year. Its 12-month target share price should hit $68. As of Tuesday, the stock was trading at $55.38.
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