Semiconductor spending is ramping up, as Chinese demand and the mobile Internet’s continued growth drive chip sales. Now flush with cash, the chipmakers will look to buy more equipment to increase their output. It’s a classic industry cycle, Cramer said Friday, and he found a tech spec to play it.
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“I think Novellus, even though it’s nearly at its 52-week high,” Cramer said, “is a buy, buy, buy.”
How can he be so sure? Partly because Applied Materials , the biggest semi-equipment company, caught an upgrade this week on order increases, cost cuts and market-share gains. That means Novellus “must be in great shape, too,” Cramer said.
The company provides two important kinds of equipment: one called Electrochemical Disposition, which puts copper on an integrated chip to enable current conduction; and another called Plasma-Enhanced Chemical Vapor Disposition, used to place insulating and conductive films on silicon wafers. With the memory market using more and more copper interconnects, sales of this equipment should increase.
And capital expenditures are picking up across the industry. Samsung, a Novellus client, is boosting its cap ex 50% to $5.4 billion. Novellus itself expects a 40% to 55% bookings increase in the third quarter.
Novellus played it smart during the downturn as well. The company cut costs, and employees, ahead of the dip, helping it to weather the storm. Now Novellus is in good position to take share from Applied Materials, which is pushing through a reorganization.
Cramer said Novellus also makes for a great takeover target. The company’s sitting on $587 million in cash, or about 25% of the $21 share price. And the balance sheets carries only $111 million in debt. Who’s the most likely suitor? Tokyo Electron, a company with which Novellus already has a key partnership.
Investors should keep in mind that when the semiconductor-equipment cycle hits, it hits fast. So Novellus may look expensive, trading at 26 times 2010 earnings, but that multiple will drop once the orders pick up. You might want to buy in on Monday, Cramer said, because Intel could announce an increase in cap ex when it reports earnings on Tuesday.
“And that means investors will take Novellus up big,” Cramer said, “as soon as they hear it.”
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