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Finance

Which Semiconductor Manufacturing Equipment Stock is a Better Buy?

Lam Research Corporation (LRCX) and Kulicke and Soffa Industries, Inc. (KLIC) are two established companies that play an important role in providing equipment in the semiconductor industry. LRCX is a supplier of wafer fabrication equipment and services to the semiconductor industry. Headquartered in Singapore, KLIC designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, such as integrated circuits (ICs).

The global semiconductor shortage on the back of rising demand for chips from several industries–such as electronics and automotive–is pushing semiconductor companies to ramp up production. This, combined with the huge government and private investments to increase the supply of semiconductors, is driving the demand for semiconductor manufacturing equipment. According to Fortune Business Insights, the global semiconductor market is expected to grow at an 8.6% CAGR between 2021 – 2028. So, LRCX and KLIC are expected to continue witnessing increasing demand for their solutions in the coming months.

But while KLIC has gained 108.3% over the past nine months, LRCX has returned 86.2%. Also, in terms of six months’ performance, KLIC is a clear winner with 64.5% returns versus LRCX’s 31.3%. But which of these two stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Movements

KLIC announced in February  that it had acquired a 100% equity stake in Uniqarta, Inc., which includes Uniqarta’s patent portfolio and other intellectual property rights. The acquisition is  expected to help expand the company’s product portfolio in the mini- and micro-LED technology segment.

LRCX introduced Vantex in January 2021, which is the latest in dielectric etch technology designed specifically for Sensei, the most intelligent etch platform available currently. Vahid Vahedi, the senior vice president and general manager of  LRCX’s Etch product group said, “With more than a decade of industry leadership in high aspect ratio etch, our unique learning enabled the Vantex chamber design from the ground up to offer scalability and innovation for many nodes to come.”

Recent Financial Results

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KLIC’s total revenue increased 125.7% year-over-year to $340.20 million for its fiscal second quarter, ended April 3. Its non-GAAP net income was  $79.45 million, up 367.1% from the year-ago period. Its non-GAAP EPS came in at $1.26, up 384.6% year-over-year.

For the quarter ended March 28, LRCX’s revenue came in at $3.85 billion, which represents a 53.7% increase from the prior-year quarter. The company’s net income for the quarter came in at $1.07 billion, up 86.4% from the prior-year quarter. Its non-GAAP EPS came in at $7.49, up 24.2% sequentially.

Past and Expected Financial Performance

KLIC’s revenue and EPS grew at CAGRs of 1.5% and 57.1%, respectively, over the past three years. The company’s revenue is expected to increase 101.6% for the quarter ending September 30, 2021, and 119.2% in  2021. KLIC’s EPS is expected to increase 547.6% for the current quarter, ending June 30, and 389.5% in  2021. Also, its EPS is expected to grow at a 20% rate of 20% per annum over the next five years.

In comparison , LRCX’s revenue and EPS grew at CAGRs of 8.8% and 32%, respectively, over the past three years. Analysts expect LRCX’s revenue to increase 30.9% for the quarter ending September 30,and 44.5% in  2021. Its EPS is expected to increase 57.9% for the current quarter, ending June 30, and 67.3% in 2021. LRCX’s EPS is expected to grow at a 31.5% rate  per annum over the next five years.

Profitability

LRCX’s $13.27 billion trailing-12-month revenue compares to KLIC’s $936.16 million. Also, LRCX is slightly more profitable, with a 46.49% gross profit margin versus KLIC’s 45.75%.

LRCX’s ROE and ROA of 69.84% and 17.37%, respectively,  compare favorably with KLIC’s 18% and 8.59%. 

Valuation

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In terms of forward EV/S, LRCX is currently trading at 6.38x, which is 220.6% higher than KLIC’s 1.99x. In terms of forward EV/EBITDA also, LRCX’s 19.27x is 159.7% higher than KLIC’s 7.42x.

So, KLIC is the more affordable stock.

(Note that KLIC is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.)

POWR Ratings

KLIC has an overall B rating which equates to a Buy in our proprietary POWR Ratings system. However, LRCX has an overall C rating, which represents Neutral. The POWR Ratings are calculated by considering 118 different factors, with the weighting of each optimized to improve overall performance.

KLIC has a B grade for Momentum, which is in sync with its 64.5% gains over the past six months and 6.8% returns over the past three months. LRCX also has a grade of B for Momentum, consistent with its 31.3% returns over the past six months and 15.3% gains over the past three months.

However, LRCX has a C grade for Value. This reflects its 6.38x forward EV/S, which is 51.2% higher than the 4.22x industry average. KLIC has a B grade of B, consistent with its 1.99x forward EV/S, which is 52.8% lower than the 4.22x industry average.

Of the 98 stocks in the B-rated Semiconductor & Wireless Chip industry, KLIC is ranked #6, and LRCX is ranked #56.

In addition to the POWR Ratings grades we’ve just highlighted, we’ve rated both KLIC and LRCX for Quality, Stability, Sentiment and Growth. Click here to see the additional ratings for KLIC. Also, get all LRCX’s ratings here.

The Winner

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With the increasing application of semiconductors across several industries, the demand for semiconductor manufacturing equipment is also expected to increase greatly  in the coming months. And while both KLIC and LRCX are well positioned to benefit from the industry tailwinds, we think KLIC’s relatively lower valuation and impressive growth prospects make it a better buy.

Our research shows that the odds of success increase if one  bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about top-rated stocks in the B-rated Semiconductor & Wireless Chip industry. 

Click here to checkout our Semiconductor Industry Report for 2021


KLIC shares were trading at $53.30 per share on Friday afternoon, up $1.61 (+3.11%). Year-to-date, KLIC has gained 68.06%, versus a 13.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Ananyo Guha Niyogi

Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand. More…

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