European earnings season: Will China tailwinds offset FX headwinds?

European semiconductor equipment manufacturers are entering earnings season facing a mixed outlook, primarily driven by significant foreign exchange headwinds from a weaker U.S. dollar, which Morgan Stanley anticipates will depress Q2 orders and margins for dollar-exposed firms like ASM International (ASMI) and VAT Group, with forecasts notably below consensus. However, robust Chinese demand is expected to offer a partial offset and long-term tailwind for some, leading to slight FY25 forecast raises for companies like ASML Holding and VAT Group. BE Semiconductor Industries (BESI) presents a potential upside surprise, with Morgan Stanley's order estimate above consensus, highlighting a nuanced and divergent performance outlook across the sector.

Analysis

European semiconductor equipment manufacturers are approaching the upcoming earnings season with a divergent outlook, shaped by the competing forces of significant foreign exchange headwinds and strengthening demand from China. According to a Morgan Stanley analysis, a weaker U.S. dollar is expected to create a high-single-digit sequential headwind on second-quarter order intake for companies with high dollar exposure, including ASM International (ASMI), BE Semiconductor Industries (BESI), and VAT Group (VACN). This currency pressure is forecast to be most impactful on VAT Group's margins. In contrast, robust momentum from China is providing a partial offset, leading Morgan Stanley to slightly raise its full-year 2025 forecasts for key beneficiaries ASML Holding (ASML) and VAT Group. The divergence is stark at the company level: ASMI faces a potential order miss, with Morgan Stanley forecasting €800 million against a consensus of €851 million, citing a 6.5% FX headwind that consensus may not reflect. Conversely, BESI is positioned for a potential upside surprise, with an order estimate of €157 million, above consensus, driven by specific new contracts. VAT Group faces the most challenging near-term report, with a forecast of CHF 249 million in orders, well below the CHF 275 million consensus, due to both FX and elevated inventory. Meanwhile, Aixtron (AIXGn) is anticipated to deliver an in-line quarter with no changes to guidance.

Key Decisions for Investors

• Investors should brace for potential negative earnings surprises from European semiconductor firms with high U.S. dollar exposure, as consensus estimates may not fully capture the reported 6.5% FX headwind, particularly for ASM International and VAT Group.
• Consider a tactical long position in BE Semiconductor Industries, which is positioned for a potential upside surprise on order intake that could break its recent trend of underperformance against street expectations.
• For ASM International, a potential Q2 order miss could create near-term price weakness, which long-term investors might view as a buying opportunity if the company successfully reaffirms its FY25 growth guidance.
• Closely monitor management commentary on China, as sustained strong demand is the primary long-term tailwind that could offset near-term FX and inventory challenges for companies like ASML and VAT Group.