Although Wall Street has been on a wild ride this week, companies with fairly clear demand prospects appear to be weathering the storm. Semiconductor equipment makers are humming along because semiconductor sales are expected to remain strong, which fuels demand for equipment.
Shares of San Jose, Calif.-based KLA, which is expected to report earnings of 32 cents a share tomorrow, closed up $2.56 to $86.38. Meanwhile, Applied, which controls approximately 50 percent of the market in certain product lines, jumped $1.25 to $104.63.
"I'd say the two stocks are bellwethers for the semiconductor equipment sector," Deahna said in an interview. "Right now the sector is incredibly healthy and is showing earnings momentum. So it's a safe haven for the near term...but beyond the next two quarters it's unclear because of the potential of industry cyclicality."
Continued growth in semiconductor equipment stocks can mean good news for other companies. When these companies achieve strong quarters, semiconductor makers often will follow six to nine months later with exceptional sales, several analysts have said.
Deahna raised his price target on Santa Clara, Calif.-based Applied Materials to $120 from $105 and hiked the target for KLA-Tencor to $105 from $90. He left earnings estimates unchanged and maintained a "strong buy" rating on both companies.
Deahna expects "stellar" second-quarter earnings from Applied because the company resolved the software glitches that plagued first-quarter shipment schedules. He also believes bookings have picked up from the previous quarter, when the company booked $2.36 billion in shipments. Deahna believes second-quarter bookings will range from $2.8 to $3 billion.
"We think the upper end of the range is more likely, which should drive a significant upside earnings estimate revision," he said in his report.
KLA, meanwhile, is expected to significantly grow margins to the 60 percent range by the second quarter of fiscal year 2001 from 54 percent in the year-ago quarter, which ended last December, said Deahna.
Chip equipment makers will also likely receive a boost from Intel. The company said yesterday that it will double its spending to nearly $6 billion to keep up with surging demand.
"Clearly capital equipment makers will benefit from the upside in spending," Mark FitzGerald, an analyst at Merrill Lynch, said in a note to investors.
KLA-Tencor will report earnings tomorrow, and analysts surveyed by First Call expect the company to make 32 cents a share compared with last year's 11 cents.
Michael Kanellos contributed to this report.