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4 Firms Basking in the Intel Effect

On the Street by Sarah Morgan
Published April 14, 2010

When Intel (INTC: 24.21*, +0.69, +2.93%) reported an earnings surprise on record first-quarter sales after Tuesday’s market close, company employees and investors were not the only ones celebrating. Because of the company’s size and influence, what’s good for Intel is often good for a number of other firms throughout the tech supply chain.

The rebound in business spending that’s boosting Intel’s bottom line will also benefit other chip makers like Advanced Micro Devices (AMD: 10.17*, +0.28, +2.83%) or Marvell Technology Group (MRVL: 22.68*, +0.13, +0.57%), says Dunham Winoto, a semiconductor analyst with Avian Securities. Networking equipment companies like Cisco (CSCO: 27.14*, +0.26, +0.96%) should benefit from the strength in server sales that Intel’s results indicate. And growth at Intel is a good sign for companies that use its chips in their products. Intel’s processor refresh cycles are “a key growth driver” for Super Micro Computer (SMCI: 18.09*, -0.18, -0.98%), for example, which updates its servers when new chips are available, says Douglas Reid, an analyst at Thomas Weisel Partners.

Intel’s most direct impact on the tech sector, of course, is on its own suppliers, the smaller companies that provide materials or technologies essential to the chip maker’s manufacturing process, like measuring equipment that ensures efficiency of production or chemicals that help make silicon wafers perfectly smooth.

Intel’s results were a welcome sign to its suppliers. The company reported revenue of $10.3 billion, up from $7.1 billion a year ago, and diluted earnings per common share of 43 cents, up from 11 cents. The company’s gross margin was strong at 63%, and guidance for the second quarter projects an increase to 64%.

That strength appears likely to continue. The implementation of a cost-saving new manufacturing technology should help keep margins above 60%, and Intel and other tech companies will benefit from increased business spending on PCs and servers throughout the year, says Winoto.

Here’s a look at four suppliers that may be celebrating Intel’s blowout quarter:

Nanometrics Incorporated

Nanometrics (NANO: 11.65*, +0.20, +1.74%) is a supplier of metrology systems used in semiconductor manufacturing. The company provides technology that offers precise measurements to improve productivity. According to the company’s annual report filed with the Securities and Exchange Commission, Intel represented 10.4% of Nanometrics’ revenue in 2009. Nanometrics reported 53% year-over-year growth in product revenues, but a 17% decline in service revenues, for the fourth quarter of 2009. Overall, the firm posted a loss of a penny a share, narrower than its loss of 14 cents a share in the same quarter in 2008. Revenue for the full year was down 25% from 2008. The company says it expects “significant revenue growth” in the first quarter. Those results will be announced May 6, after the market closes.

Cabot Microelectronics

Cabot Microelectronics (CCMP: 40.24*, -0.10, -0.24%) makes polishing compounds and pads used in the semiconductor manufacturing process. The company reported record revenue of $97.7 million for its fiscal first quarter, ending Dec. 31. Revenue was up 55% over the year-ago quarter. Earnings of 56 cents a share were also up strongly from a penny a share in the year-ago quarter. Intel’s strong results confirm Cabot’s assessment that the outlook for semiconductors remains strong for 2010, says Jay Harris, an analyst at Goldsmith & Harris. “Intel has just signaled a very high activity level, remarkably high for what has traditionally been a seasonally weak quarter of the year for [manufacturing] activity,” Harris says. He expects earnings of between 50 and 55 cents a share when the company reports its fiscal second-quarter results on April 22 before the market opens.

Air Products

Air Products (APD: 76.57*, +0.56, +0.73%) and Praxair (PX: 87.43*, +1.55, +1.80%) are industrial gas suppliers to a wide variety of industries, including semiconductor manufacturing. Air Products’ Electronics and Performance Materials division generated sales of $433 million in its first fiscal quarter, out of total revenues of $2.17 billion. Overall sales declined 1% compared to the previous year, but sales in the electronics division grew 7%. Air Products is scheduled to report second-quarter earnings on April 22.

KMG Chemicals

KMG Chemicals (KMGB: 20.29*, +1.39, +7.35%) makes specialty chemicals for wood preserving and animal health businesses, as well as for the semiconductor industry. The company has been expanding its electronics business over the past couple of years – an acquisition of part of Air Products’ chemicals business closed at the end of 2007, doubling the size of the company, and an acquisition of General Chemicals’ electronic chemicals business closed on March 29. Those recent acquisitions now represent more than half the company’s revenues. The semiconductor business helped KMG deliver record earnings in its July quarter, during the depths of the recession, Harris says. The company is “what I call the stealth way of playing the trend” in semiconductors, he says.