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Soon, Varian May Really Be In The Chips

Varian Semiconductor Equipment Associates (VSEA) (VSEA) jumped 8% when the market opened on Apr. 29 -- after a report of surprisingly strong earnings and improved prospects. Watch for more such happy days, says Patrick Ho of broker Legg Mason (LM). Ho believes Varian shares will climb from their recent 38 to 53 in 12 months. The company is in a prime position to profit from a rebound in demand by semiconductor companies. Varian makes specialty machines that implant ions in wafers so the chips can be more powerful. The machines, Ho argues, will attract more orders from top-tier chipmakers such as Intel (INTC) and Samsung, which have been working off inventories and looking to make next-generation chips. He sees Varian earnings climbing in the fiscal year ending Sept. 30, 2006, to $2.55, up from $1.65 this year. That would support the stock at 53, or 21 times earnings. A.G. Edwards (AGE) analyst Gavin Duffy's target on the stock is 45, with a p-e of 18 on his 2006 estimate of $2.45. The risk in Varian is low. The company has little debt and holds cash and short-term investments of $12 a share.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By David Henry

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