When Intel (Nasdaq: INTC) announced plans in mid-January to spend an eye-popping $9 billion on capital spending, tech analysts sat up and took notice. Many of them have been lukewarm on chip stocks for so long that they simply didn’t see it coming. And when Samsung and Taiwan Semiconductor (NYSE: TSM) followed up with similarly aggressive plans for 2011, it became apparent that the entire chip industry was now in full-growth mode.

The prime beneficiary of the newfound momentum in capital equipment spending: Applied Materials (Nasdaq: AMAT). I told readers to buy shares two months ago, as there was simply too much pessimism around the world’s largest semiconductor capital equipment firm.

And it looks as if The Street is still underestimating this tech powerhouse. The recent 28% spike in the stock was impressive, but I see another 25% or so move coming this spring.

On its way to $20?
As I’ve noted in the past, analysts tend to move very slowly, judging stocks by how the next quarter will fare. Price targets are raised and lowered based on updated 90-day forecasts. But when it comes to highly cyclical industries like semiconductors, you’ve got to look much farther out to make money. And the long view for Applied Materials is brighter than many suspect.

#-ad_banner-#When the global economy hit the skids, demand for semiconductor capital equipment fell sharply. Applied Materials’ sales fell 38% in fiscal (October) 2009 to levels not seen since 2003. Sales posted an impressive 90% rebound in fiscal 2010 to $9.5 billion, but that was still below levels seen back in 2007.

Right now, analysts think Applied Materials’ growth phase is largely finished. Consensus forecasts call for sales to rise 4% in fiscal 2011 and 2% in fiscal 2012. They’re being too cautious. Regarding the entire semiconductor capital equipment industry, “it’s going to be a very positive year, much more positive than folks had anticipated,” noted Gartner’s Dean Freeman in a recent interview with Bloomberg. His firm had assumed that industry sales would slump 1% in 2011, but just revised their forecast to 10% growth.

For Applied Materials, the implications are pretty clear. Intel, Samsung and Taiwan Semiconductor, which are the three largest chip makers in the world, each count Applied Materials as their leading equipment supplier. Samsung had a well-publicized spat with Applied Materials over theft of intellectual property by a rogue employee, but that spat has been resolved and the two firms have noted plans to work more closely in 2011.

One of the reasons analysts tend to be cautious about the chip equipment sector is the nature of its customer base. Throughout the past decade, its fortunes were closely tied to PCs. Now, you can find chips in a widening array of devices, from phones to cars to tablet PCs. That diversification should lead to less sales volatility, and as a result, higher multiples for the stocks in question.

Action to Take –> An expansion in the price-to-earnings (P/E) multiple, coupled with a rise in earnings, is why I remain bullish on Applied Materials.

Analysts currently think the company will earn around $1.25 a share this year and $1.34 in fiscal 2012. Yet the robust spending plans recently announced by Intel and its peers make that consensus forecast look far too conservative. I think $1.50 in earnings per share (EPS) this year and $1.75 in EPS in fiscal 2012 may be more like it. As that 2012 (admittedly bullish) forecast comes into view, shares may trade up to 12 times that forecast, or into the low $20s. That’s why I see shares rising 25% — or more — from current levels.

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