(By Balaseshan) Deutsche Bank analyst Vishal Shah downgraded rating of KLA-Tencor Corp. (NASDAQ:KLAC) to "Sell" from "Hold" and lowered price target to $44 from $56.
Shah expects improving 28nm yields to negatively impact demand for process control equipment in the foundry sector and see risk of a multi-quarter bookings slowdown in 2013.
With shares trading near 52-week highs, at a premium valuation and considering high investor expectations, the analyst recommends investors take profits as he sees downside to about $40-$45 levels.
Shah said demand for process control equipment has generally outperformed other equipment categories in this up cycle, particularly in the foundry sector.
But the analyst expects this trend to change, as KLAC's 2012 foundry orders imply the foundry segment is on pace to about 150,000 wspm incremental process control capacity, well above the 90,000-100,000 wspm capacity projections from semicap companies.
Coupled with the fact that 28nm yields are finally increasing and process control intensity at 20nm node could potentially decline (less process variants at 20nm, no 20nm tool upgrade cycle such as SP3 for 28nm, stagnating die sizes), the analyst sees KLAC's bookings performance lagging peers.
Shah does not believe that consensus is accurately pricing the downside risk to KLAC's earnings in calendar 2013. Currently the street expects calendar 2013 EPS of $4.69, versus his estimate of $4.13. Embedded in the street's earnings estimate is revenue growth of 6%, compared to his estimate of a 4% decline in revenue.
Given the potential headwinds within foundry, slowing demand for process control (driven by better yields) and a slower than expected recovery in memory, the analyst believes these estimates are overly optimistic.
Furthermore, since Semicon West in July, when foundry softness was first reported, KLAC's calendar 2013 earnings estimates have only declined by 1%, versus semicap peers, where earnings which have undergone a 13% downward revision. As a result, the analyst sees further room for downward revisions as the year progresses.
KLAC is trading down 2.52% at $51.65 on Tuesday.