Talk about rebounds!

In 2009, ASML Holding (ASML), a maker of lithography equipment used to etch computer circuits onto silicon, lost 45 cents per ADS (American Depository Share).

In 2010, Standard & Poor's is projecting that the company will make $2.41 per ADS.

The reason for the rebound is pretty simple: The recovery in the markets for PCs and servers (see this post) and other computer hardware has convinced the makers of every kind of chip to open their wallets and begin spending on manufacturing equipment again. (That's why I picked it to add to my portfolio in today's post).

ASM Lithography is the top provider of tools used in the most critical semiconductor fabrication process. The in-depth technological expertise required to make these tools helps protect the firm's strong competitive position. After a tough 2009, ASML is experiencing a strong rebound in business conditions.

Netherlands-based ASML is only the third-largest supplier of semiconductor manufacturing equipment in the world, but according to Standard & Poor's it has a dominant 65% share of the market for lithography equipment. (That may have grown to as much as 80% of the market during the economic downturn. It remains to be seen how much of that extra market share ASML can keep.)

Advances in lithography tools, which use a light source to create circuit patterns on a silicon wafer, are the key to packing more and more circuits ever more densely onto smaller and smaller chips. Smaller and more powerful chips are, in turn, the key to staying on top whether you're a chipmaker such as Intel (INTC) or Taiwan Semiconductor Manufacturing (TSM) or a cell phone or lap top or iPad maker. 

Lithography tools make up about 15% to 20% of capital spending at chipmakers, so it should come as no surprise that when ASML announced its first-quarter earnings, the company said it was on track in 2010 to beat its record sales of $5.2 billion set in 2007.

“Our customers,” said chief financial officer Peter Wennink in the company's conference call, “have underinvested in the last two to three years.”

In the highly cyclical semiconductor equipment industry, the big question is always how long will the good times last. In the case of ASML, I think investors are looking for a cycle that could stretch out into 2014.

The key is a new generation of equipment that is necessary if chip makers are to achieve the 30% to 40% reduction in circuit size that they've targeted in their own production plans. 

ASML started shipping its first platform for that new standard in 2008 (even if not many customers were buying it), and ASML plans to ship re-production units based on a new technology called extreme ultraviolet light (EUV) late this year with full-scale production in 2012. 

Wall Street analysts say that the new EUV products give ASML roughly a two-year lead on its main rivals Nikon (NINOY) and Canon (CAJ).

As of April 20th, I'm adding shares of ASML to Jubak's Picks with a target price of $42 a share by December 2010.

At the time of this writing, Jim Jubak didn't own shares of any company mentioned in this post.