On a day when all the major averages all closed more than 2.5% higher – the biggest one day percentage gains in two and a half years – one industry stands out as an even bigger winner, the semiconductor equipment manufacturers. Already posting strong gains for the year even after last week’s steep sell off, two industry leaders outpaced the broader markets - Applied Materials (AMAT - Free Report) and Lam Research (LRCX - Free Report) with each gaining approximately 6%.
The semiconductor equipment manufacturers enjoyed a record year in 2017, with $55.9B in sales, up sharply over the previous year’s $41.2B. Sales are expected to increase even further in 2018 to $60.1B, a 7.5% increase and the second consecutive record high, according to SEMI, the global trade association for the Semiconductor supply chain industry.
The stocks in the sector have been rewarded handsomely, with the top players more than doubling in price since 2016. These impressive price increases were well justified however by similar increases in revenue and net earnings at these well-run companies, so they remain attractively valued as compared to market indices.
LRCX also recently announced a $2B stock buyback.
AMAT trades at a forward P/E ratio of 12.57 with LRCX at 12.09, versus approximately 25 for the NASDAQ 100 index. Both also sport lower P/E’s than industry competitors KLA-Tencor (KLAC - Free Report) , Advanced Energy Industries (AES - Free Report) and ASML Holdings (ASML - Free Report) . Semiconductor stocks do have a history of trading at lower prices relative to earnings than the major indices owing largely to their higher price volatility, but both of these names are currently trading below their own historical P/E’s and well below the overall P/E of the Philadelphia Semiconductor Index (SOXX - Free Report) of which they are both components.
AMAT and LRCX both have a Zack’s #1 Ranked (Strong Buy), based on a recent history of positive earnings estimate revisions (with AMAT joining the list today.)