Varian Semiconductor Equipment Associates: making the equipment that makes your chips

Posted May 31st 2007 2:45PM by Larry Schutts
Filed under: Earnings Reports, Analyst Upgrades and Downgrades, Applied Materials (AMAT), Technical Analysis

Society's ballooning appetite for devices controlled by semiconductor-integrated circuits emphasizes the need for high-quality chip processing equipment. One of the world's best known makers of such equipment is headquartered in Gloucester, Massachusetts.

Varian Semiconductor Equipment Associates (NASDAQ: VSEA) is engaged in the design, manufacture, marketing, and servicing of semiconductor processing equipment used in the fabrication of integrated circuits. The firm is the world's top manufacturer of ion implantation systems, which are used to build the transistors that are the basis of integrated circuits. The company also offers consumables, product upgrades, services, spare parts, and support. Varian Semiconductor has sold systems to each of the twenty largest chip makers in the world and has won first place on the prestigious VLSI Research 10 BEST list, in eight of the last nine years. Applied Materials (NASDAQ: AMAT) is a major competitor.

The firm pleased shareholders late last month, when it reported Q2 EPS of $0.69 and revenues of $241.8 million. Analysts had been expecting $0.66 and $239.1 million. Management also guided Q3 EPS to $0.89-98 ($0.68 consensus) and Q3 revenues to $271-$286 million ($240.75M consensus). AG Edwards, Needham and Stifel Nicolaus subsequently declared the stock a "buy." VSEA shares popped on the news and then moved into a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Altogether, brokers recommend the issue with two "strong buys," five "buys," four "holds" and two "sells." Analysts see an 18% average annual growth rate through the next five years. The stock's Sales Growth rate (41.81%), EPS Growth rate (165.38%), Operating Margin (19.76%), Net Profit Margin (15.35%), Return on Assets (14.31%) and Return on Investment (17.46%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 600 SmallCap Index. Over the past 52 weeks, it has traded between $17.25 to $46.92. A stop-loss of $36.50 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.

Tags: flag, fundamental analysis, FundamentalAnalysis, momentum, technical analysis, TechnicalAnalysis, Varian Semiconductor Equipment Associates, VarianSemiconductorEquipmentAssociates, VSEA