Goldman On KLA-Tencor, Lam Research: Stay Bullish Into 2017

While expressing optimism regarding the prospects of the semiconductor capital equipment group, Goldman Sachs’ Toshiya Hari forecasted 3 percent semi capex growth in 2017. The analyst added that the SPE stocks were trading at a 22 percent discount to the S&P, the gap currently being the highest in five years, despite solid fundamentals.

Acceleration in 3D NAND spend in the first half of 2017 and foundry spend in the second half could result in an average 11 percent top-line growth for Applied Materials, Inc. AMAT, KLA-Tencor Corp KLAC and Lam Research Corporation LRCX in 2017, Hari projected.

The analyst believes 2018 could also be a positive year for the group, with China “contributing to potential upside as local manufacturers ramp production facilities.”

Lam Research

Hari upgraded the rating on the company from Neutral to Buy and added the stock to the Americas Conviction List. He raised the price target from $116 to $125, which reflected 20 percent upside potential.

The analyst mentioned the following reasons for being bullish:

• Product positioning: The company had a meaningful and growing share in deposition and etch, two of the fastest growing segments in WFE [wafer fab equipment].
• Upside to Street numbers: The EPS estimates for 2016 and 2017 were above the Street expectations by 11 percent and 16 percent, respectively.
• Potential re-rating: “Lam has historically traded at a discount to peers given its outsized exposure to memory. However, we believe improvements in its logic business will persuade investors to apply a higher multiple to the business.”

KLA-Tencor

Hari initiated coverage of the company with a Buy rating and a price target of $90, reflecting 15 percent potential upside.

After having underperformed peers in terms of revenue generated between 2013 and 2015, the company seems poised to deliver 2017 results in line with the broader industry and even outperform in 2018. The analyst added that the EPS estimates for 2017 and 2018 were above the Street by 5 percent and 13 percent, respectively, and that revisions in expectations could be the primary catalyst for the stock.

Lam Research and KLA-Tencor terminated merger talks in October, resulting in volatility in both stocks.

At Last Check

• Applied Materials shares were down 1.45 percent at $32.04 in Monday's pre-market session.
• Shares of KLA-Tencor closed Friday's session down 1.47 percent at $78.19.
Lam Research closed Friday trading down 1.57 percent at $104.45.

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