Analysts upped their target prices for ASML Holding
), Europe's biggest semiconductor equipment maker, after the company reported first-quarter earnings of 68 cents a share (2 cents above consensus projections) on April 18.
Trouble is that the new higher targets are for just $55 a share or so, and with the stock trading Thursday at $49.88, I don't think that's enough of an upside given the uncertainties in equipment orders from ASML's biggest customers in coming quarters. ASML Holding is a member of my Jubak’s Picks 12-18 month portfolio
. I'll be selling the shares out of that portfolio Thursday with a 39.4% gain since I added it on April 20, 2010.
You should think of ASML shares as victims of their own success. The stock was up 23.6% for 2012 as of the close on April 27. And ASML shares are up 42% since the $35.85 low on Nov. 25, 2011. On April 19, the stock hit a 12-year high.
(Please note that ASML is scheduled to pay a dividend of 0.46 euros a share (roughly 60 cents) on May 15 to shareholders of record on May 2. If you sell Thursday, you still get the dividend.)
It's not that ASML had bad things to say about the rest of 2012. In fact, the company raised its revenue guidance for second quarter.
But the company didn't give guidance for second-quarter earnings on April 18, and I think that reflects a problem for holders of ASML. Because of a steady consolidation in the number of companies making chips, more companies -- Apple
) and Qualcomm
) to name two -- contract their chipmaking to fewer and fewer big fabs run by the likes of Samsung and Taiwan Semiconductor Manufacturing
). That means the equipment orders to companies like ASML are bigger and lumpier.
Taiwan Semiconductor recently increased its capital budget for 2012 to $8 billion to $8.5 billion from $6 billion. That's certainly good news for companies such as ASML, KLA Tencor
) or Lam Research
But given recent news on component shortages from chip consumers such as Apple and Qualcomm, it’s also clear that the exact rate of ramp up for new manufacturing lines is uncertain. Working backward, that suggests that the exact timing of orders to equipment makers may be uncertain too.
I don't doubt the reality of the increase in capital spending from chip manufacturers that the sector is seeing. I just worry about the danger of a big order slipping from one quarter to another. That would clobber the shares of a company like ASML or Lam Research, and at the current price for ASML shares I just don't think investors have enough potential reward to take that risk.
I'd much rather revisit this stock in August or September when, even if shares haven't pulled back in price, we're likely to have more visibility on 2012 orders. And that would lower the risk in the shares.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of ASML Holding as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
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