Barclays' Semi Capital Equipment team is out positive on the space saying they expect the SemiconWest trade show next week will spark renewed interest in semi equipment stocks and they recommend investors increase exposure to the group. Firm looks for growing visibility to double-digit Q/Q order growth through 2009 and that this will lead to strong earnings revisions ahead. They expect growing confidence of increased spending from Samsung and Hynix and that this will be a major catalyst for shares.
- Varian Semiconductor (NASDAQ:
) is upgraded to Overweight from Equal Weight with a $35 price target (prev. $26).
The key drivers for the upgrade include: 1) They expect a beat on the Sep Q guide; 2) VSEA has a strong core franchise aided by aggressive cost cuts; 3) Firm sees visibility to growth from adjacent opportunities by 2011; and 4) the company has strong leverage to memory makers, which they believe will be the key incremental order driver in 2H09.
Expect a Beat on the Sep Q Guide
While Barclays expects June Q results to come in in-line with expectations, their checks suggest that continued foundry spending coupled with a modest orders from memory makers should drive Sep Q guidance of $90-100M, above consensus of $86M and near the company’s new breakeven level of ~$100M (vs. consensus EPS of -$0.10). This is a significant accomplishment for a company perceived as a “capacity driven” name, with limited leverage to the current tech buys. And with momentum continuing into Dec Q as well driven by memory, they see high likelihood for consensus estimates to head higher following the earnings call.
- KLA-Tencor (NASDAQ:
) is also upgraded to Overweight from Equal with with a $32 target (prev. $25)
Near-term, they expect a strong beat and raise when KT reports. For June Q, the firm now models revs/EPS of $310M/-$0.08 (cons $299M/-$0.16). And supported by orders at high end of guide or better ($330+M), they look for mgmt to guide to much better Sep Q - they model $340M/$0.04 (cons $317M/-$0.08). Importantly, the firm looks for KT to be first lg cap eqpmt maker to reach B/E results.
Medium to longer term, they envision 4 drivers behind outperformance relative to WFE - 1) memory move to copper, 2) self-aligned double patterning, 3) adoption of high-k/metal gate by foundry/memory, and (iv) ongoing NAND shrinks.
Layer in aggressive cost cutting, and the firm sees $2.00 in earnings power in 2011, their new normalized EPS estimate. This in turn drives new price target of $32, suggesting 25+% potential upside from current levels.
Notablecalls: VSEA is my favourite of the two, despite the fact we have also Soleil upgrading KLAC today (to Buy from Hold).
I think both of these will enjoy 3-5% upside today (depending if the market will hold up).
