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Memory Exposure Drives BofA Downgrade Of Lam Research, Applied Materials; Analyst Says KLA-Tencor A Defensive Pick

Shanthi Rexaline

Bank of America Merrill Lynch is projecting slackened demand for wafer fab equipment, making the sell-side firm wary of semiconductor equipment makers.

The Analyst

  • Analyst Vivek Arya downgraded shares of both Lam Research Corporation (NASDAQ: LRCX) and Applied Materials, Inc. (NASDAQ: AMAT) from Buy to Neutral.
  • Arya has a $200 price target for Lam Research and a $49 price target for Applied Materials.
  • The analyst reiterated a Buy rating on KLA-Tencor Corp (NASDAQ: KLAC) with a $140 price target.

The Thesis

Citing recent memory and foundry pushouts, BofA lowered its year-over-year WFE growth outlook for 2018 from 10 percent to 7 percent, Arya said in a Monday note. (See his track record here.) 

The analyst lowered 2019 and 2020 estimates, attributing the action to lower memory capex.

Memory capex is likely to decline 7-8 percent in 2019 compared to previous expectations for flat-to-1-percent growth, Arya said.

BofA is uncertain when spending will begin to reaccelerate, although it is not expected until at least the second half of 2019, the analyst said. 

Memory A Sore Spot

Even with a forecast for a muted recovery in 2019, BofA expects relative growth in foundry/logic but declines in memory, which saw a major capex investment cycle in 2017 and 2018. Weaker high-end smartphone sales are keeping the pricing of NAND memory in check and in turn impacting investor and stock sentiment, Arya said.

Foundry investments should rise 10 percent in 2019, with IDM/Logic flattish amid an industry shift toward leading-edge 10/7nm nodes, the analyst said. 

"Hence, on relative basis, we prefer more foundry/logic and technology exposure vs. memory and production." 

Although the services business and the Chinese drive to develop a domestic memory and foundry manufacturing footprint could boost core WFE growth, BofA said this is unlikely to offset the muted WFE outlook.

Limited Earnings Growth Forecast For Lam Research, Applied Material

The muted sectoral growth environment — along with margins that are trending near or at peak levels — could limit earnings growth for Lam Research and Applied Materials, Arya said. This offsets the advantages vested by the companies' low valuations, he said. 

KLA-Tencor A Defensive Name

BofA sees KLA-Tencor as a defensive name, since it is "levered more to technology transitions than production," Arya said. 

The Price Action

At the time of publication Tuesday:

  • Lam Research shares were slipping 1.7 percent to $173.22.
  • Applied Materials stock was declining 1.07 percent to $43.27. 
  • KLA-Tencor shares were edging down 0.31 percent to $117.12. 

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Latest Ratings for LRCX

Date Firm Action From To
Aug 2018 Bank of America Downgrades Buy Neutral
Jul 2018 Citigroup Maintains Buy Buy
Jul 2018 Morgan Stanley Maintains Overweight Overweight

View More Analyst Ratings for LRCX
View the Latest Analyst Ratings

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