Discussion - Chip Manufacturers

١٩ /٩ /٢٠١٧ Chip Gear Makers Perfect the Earnings Machine - WSJ

https://www.wsj.com/articles/chip-gear-makers-perfect-the-earnings-machine-1503416501?shareToken=st2fcb4b98075b4f41a732da708655d228&refli… 1/2

Makers of semiconductor manufacturing equipment are more profitable than ever, which poses an interesting dilemma for investors accustomed to buying low and selling high.

Applied Materials and Lam Research , the two largest companies in the space, reported record operating profits for their most recent quarters. The expansion has been significant. Applied’s operating income nearly doubled for the trailing 12 month period ended July 30. Lam’s surged 76% for the trailing 12 months ended June 25. The two companies grew sales by 40% and 36%, respectively, for the same period.

This hasn’t been lost on investors. Applied Materials’ share price has jumped 46% over the last 12 months, while Lam’s has surged by 70%. That has put both stocks are their

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https://www.wsj.com/articles/chip-gear-makers-perfect-the-earnings-machine-1503416501

HEARD ON THE STREET

Chip Gear Makers Perfect the Earnings Machine Market values have surged at Applied Materials and Lam Research. But a rapidly expanding bottom line has actually made the stocks cheaper.

Chipped In Operating income per calendar quarter*

THE WALL STREET JOURNAL Source: S&P Capital IQ Note: *Applied's fiscal quarter ends one month later

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Lam Research Applied Materials

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Aug. 22, 2017 11:41 a.m. ET By Dan Gallagher

AMAT 0.44% ▲ LRCX -0.11%

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١٩ /٩ /٢٠١٧ Chip Gear Makers Perfect the Earnings Machine - WSJ

https://www.wsj.com/articles/chip-gear-makers-perfect-the-earnings-machine-1503416501?shareToken=st2fcb4b98075b4f41a732da708655d228&refli… 2/2

highest levels in more than a decade. This performance stands out even in the booming chip sector, where the PHLX Semiconductor Index has jumped 34% in value over the same time.

But, thanks to their rapidly expanding bottom lines, both stocks now look cheaper despite their gains. Applied Materials now trades just under 12 times forward earnings compared with 15 times a year ago, according to FactSet. Lam’s multiple has slipped from 13.4 times to 12.2 times. The peer group represented by the PHLX index is averaging about 15 times forward earnings.

That should help soothe investors who might be nervous about a downturn on the horizon. Chip manufacturing gear is a cyclical business, but the industry is benefiting from an especially sustained uptick in demand for memory and processors that is driven by significant technology shifts under way in markets such as data centers and automobiles. Those shifts are still in their early days. China is also working to build up a domestic semiconductor industry and has several new fabrication plants under construction. Those fabs will require production equipment well into the next year, which should chip in a little more growth to the sector’s already strong run.

Write to Dan Gallagher at [email protected]

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