Daily BriefsJapan

Japan: Tokyo Electron and more

In today’s briefing:

  • Tokyo Electron (8035 JP): Getting Ahead of Itself

Tokyo Electron (8035 JP): Getting Ahead of Itself

By Scott Foster

On January 10, we wrote that demand for semiconductor equipment could exceed SEMI’s growth forecast for 2021, that Tokyo Electron’s guidance for FY Mar-21 was probably conservative, and that Investors in Tokyo Electron (TEL)… should benefit, even if the shares appear to be overbought. (seeTokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead  ).  

Since then, TEL has raised guidance, Intel and TSMC have announced big new capital spending plans, SEMI has raised its forecast of semiconductor equipment demand, and TEL’s share price has risen by 24%. How much more upside is there?

The shares are now selling at 34x management’s EPS guidance for FY Mar-21 and 31x our estimate for FY Mar-22. These multiples are not high compared with those of other first-rate Japanese  precision manufacturing companies, but they are double what they were two or three years ago. 

It is tempting to say that valuations are extended in what remains a cyclical industry, but the greater risk to earnings growth, in our estimation, is high and rising depreciation and R&D expenses as the company expands capacity and develops technology for the 2 nanometer node and beyond (See Screen Holdings (7735 JP): Aiming at 2nm Process Technology ).

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