Semiconductors are making so much money that it looks like the orders are roaring in for an ASML (ASML) or a Novellus (NVLS). Do you want to get short ahead of Intel? Ahead of IBM (IBM)?

Moreover, ASML, as the leader in lithography-scanner gear, has a strong balance sheet, with about €1.3 billion ($1.7 billion) in cash and €855 million ($1.15 billion) in long-term debt, including that senior note. Theoretically, it could buy back the notes with cash to spare. Hardly the stuff of default. This year the company, which sports a stock-market capitalization of $7.3 billion, is likely to lose money, but if economies revive in 2010, ASML should return to the black. Either the bonds are very cheap, Hersch argues, or the stock market has overvalued the shares. Notwithstanding the stock market's assessment, Hersch thinks the bonds could nearly double in value. And, just in case the bond market is right, Hersch also bought put options on ASML stock, which allow him to sell shares at the current price, as insurance against a sharp drop in the price. Meanwhile, the company expects to report fourth-quarter results Thursday. Investors interested in the bonds should wait for the news. Even if downbeat, it might afford a better entry point.

What do they do until then?
If you extrapolate the guidance they offered Dec. 18, the second half of '09 will get slightly better than the first half but not much better. We come up with a loss of 25 to 50 cents a share for 2009. Cash flow is likely to be break-even to a slight loss. Our price target is $25. We have a 2010 estimate of roughly €1.40 and apply a multiple of 13, which is where Applied Materials [AMAT] and KLA-Tencor [KLAC] trade on their 2010 numbers.

Shares of semiconductor equipment maker ASML are the cheapest in its group and could easily double as the economy recovers. Investors, however, will have to be patient.

ASML (ASML) downgraded to Neutral rating from Buy at UBS. Price target lifts to $31.56 from $29.99.

Semiconductor, best in breed, growth

Upgraded by Bernstein from Mkt Perform to Outperform

Downgraded by Thomas Weisel from Overweight to Mkt Weight

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