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ASML Leads Its Semi Group
Wednesday July 16, 1:18 pm ET
By Ken Nagy, CFA
ASML Holding N.V. (NasdaqGS: ASML - News) is the largest original equipment manufacturer (OEM) of advanced photolithography systems used within the semiconductor manufacturing industry. March quarter revenue and EPS outperformed consensus estimates. The company has the leading position in the next-generation immersion lithography tools, which will lead to long-term growth.
Flash memory makers are ramping chip production in the 50 nanometer (nm) range and most other semiconductor manufacturers are in varying phases of developing immersion production processes and preparing for immersion volume production. We are reiterating our Buy rating on the shares of ASML.
We expect ASML to get into 2008 with a fully utilized, optimum-capacity level. Several industry sources analysis look for a semiconductor unit growth in 2008, which would be higher than the one of 2007. The latest number calls for above 10% unit semiconductor gross and this is the driver of ASML's business. We expect it to be, therefore, a good year for lithography.
ASML shares of are currently trading at a 16.8x multiple of our 2008 EPADR estimate (P/E). The current backlog is heavily weighted towards the leading-edge 300mm and 193nm systems. While these technology orders are important, industry capacity expansion is essential for further top line growth. The next two quarters could be weak but then orders are expected to increase based on ASML building its market share and memory makers switching to immersion. Consequently, we are setting our $35.00 price target, which corresponds to a 21.3x P/E.