Reiterating a Buy on Varian Semi

Varian Semiconductor Equipment Associates, Inc. (VSEA - Analyst Report) engages in the design and manufacture of semiconductor processing equipment used in the fabrication of integrated circuits. March top and bottom-line results were split with the top-line meeting consensus estimates and the bottom-line missing due to a higher tax rate.

VSEA has superior technology and remains several product generations ahead of competitors. As Nodes transition to 90 nanometers, VSEA remains the strongest solution for ion implementation. Consequently we reiterate our Buy rating of the shares of VSEA and set a price target of $45.00, with a corresponding 21.5x P/E.

The single wafer fabricating process is gaining traction, and Varian leads the market in this area. As nodes get smaller, VSEA's equipment become more valuable. The firm's margins have been strong despite weak industry conditions and share buyback continues. The firm maintained 100% share of the ultra-high dose or PLAD market. VSEA anticipates that sales of its PLAD tool, which carries higher margins than its other tools, will almost double in fiscal year 2008 from $46 million in fiscal 2007. As a result, the firm should see its margins rebound above the 50% gross margin level.

VSEA presently trades at a multiple of 17.9x our estimate of 2009 earnings (P/E) (pro-forma adjusted for Stock option comp). While the concentration to the memory sector bears watching, we feel VSEA will continue to outgrow the broader industry by continuing to take market share.

Read the full analyst report on VSEA