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market share being challenged in
the medium term. Crucially, ASML’s
strong market position has been partly
created through the support (equity
investments) of their main customers
(Samsung, Intel and TSMC).
Does this company generate strong
return on invested capital (ROIC)?
The firm’s gross margins (total revenue
minus cost of goods sold) are high
at 47% and are expected to climb to
more than 50% by 2020. The high
overall gross margin is driven by
the company’s market position and
ensuing pricing power.
Research and development (R&D)
costs are relatively high at about
€1.5bn per annum, making up
around 14% of sales – the equipment
used in the lithography tool-making
process can be the size of a bus and
cost several hundred million Euros,
so the R&D burden is a big barrier to
entry. Other operating costs make up
only a few percent of sales, leaving
an operating margin of around 28%.
In terms of invested capital, most is
tied up in working capital and in fixed
assets used in the production process.
Whichever way you cut the numbers,
the above financial characteristics
result in a business generating strong
double digit ROIC, well above market/
industry averages.
FE TRUSTNET
[ JANUS HENDERSON ]
24 / 25
What are the risks to
the business and to this ROIC profile?
ASML currently has a very strong
market position with very few clear
challenges. In the absence of significant
technological change, ASML is
likely to continue to generate a very
strong ROIC. However, this is a field
of complex technology. It is more
difficult to have a strong insight into
this industry than with other more
straight-forward businesses, like a
drinks company, for example. With
complex technology, big changes can
happen very quickly that you don’t see
coming at all and new players can come
in with a completely new technology or
approach. So the risk with ASML is the
unknown; that a competing technology
could come in and challenge the
business’ market position, achieving the
same thing but in a different, better way.
Glossary
Price-to-earnings (P/E) ratio:
A popular ratio used to value a
company’s shares. It is calculated by
dividing the current share price by
its earnings per share. In general, a
high P/E ratio indicates that investors
expect strong earnings growth in
the future, although a (temporary)
collapse in earnings can also lead to
a high P/E ratio.
We find the business very
attractive on a long term
basis and see a medium term
outlook of high, sustainable
ROIC together with plenty of
means of capital deployment
Aside from the company’s ROIC
profile, the other risk with ASML, as
with any good company, is that the
share price valuation is high. This is
a relatively expensive stock with a
2019 price-to-earnings* (P/E) ratio of
around 27x, which is high versus other
companies in the market. The high
valuation means any doubts from the
market about the company’s ability to
deliver on its targets could see the share
price underperform. So, the valuation
itself makes it risky.
Is there scope for growth?
To some extent, we have covered the
‘supply-side’ of the business above.
As to the ‘demand-side’, a medium-
term outlook of sustained (but cyclical
from quarter-to-quarter) demand
growth looks likely. Microchips have
gone from something we associated
mainly with computers, to something
that we now see in televisions, mobile
phones, watches, heating systems, fire
alarms and locks, to name but a few –
microchips have become completely
ubiquitous, so we know the demand
side is very healthy. The demand
for microchips is likely to grow very
strongly over the next 5-10 years as the
trend towards the ‘internet of things’
continues to drive adoption.
Investment decision?
For us, ASML fits into a buy and hold
strategy; we find the business very
attractive on a long term basis and
see a medium term outlook of high,
sustainable ROIC together with plenty
of means of capital deployment (an
attractive and rare feature of a high
return business). We might trim or add
exposure around different events but
principally we want to hold it for as long
as possible.
• These are the views of the author at the time of publication and may differ from the views of other
individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned
within this article do not constitute or form part of any offer or solicitation to buy or sell them.
• Past performance is not a guide to future performance. The value of an investment and the income from it
can fall as well as rise and you may not get back the amount originally invested.
• The information in this article does not qualify as an investment recommendation.
• For promotional purposes.
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