Shares of chip-equipment makers continued a strong recovery from a summer slump Tuesday, led by a rally in KLA-Tencor Corp.’s stock.
KLA-Tencor reported fiscal fourth-quarter net income of $2.22 a share on revenue of $1.07 billion Monday evening, beating analysts’ average expectations of $2.13 a share on revenue of $1.05 billion, according to FactSet. For the September-ending quarter, KLA-Tencor estimated adjusted earnings of $2.04 to $2.36 a share on revenue of $1.03 billion to $1.11 billion, while analysts had forecast earnings of $2.06 a share on revenue of $1.04 billion.
KLA-Tencor’s rally comes on the heels of similar reactions to peers Lam Research Corp. LRCX, +1.65% and Applied Materials Inc. AMAT, +1.50% recently. Last week, Lam Research said it expects the September-ending quarter to be a bottom for demand weakness, and ASML Holding NV ASML, +0.45% reported better-than-expected results and forecast a strong second half of the year.
That relief rally follows pressure back in June when chip equipment stocks were hit by concerns about a short-term slowdown connected to production delays of 3-D NAND and DRAM memory chips at Samsung Electronics Co. Ltd. 005930, -0.54% DRAM, or dynamic random access memory, is the type of memory commonly used in PCs and servers, and NAND chips are those flash memory chips used in USB drives and smaller devices such as digital cameras. Also, price target cuts did not help chip-equipment stocks.
Beyond KLA-Tencor’s results, chip-equipment stocks also got a boost from Samsung, which said in earnings released Tuesday morning in its home country of South Korea that it expects its memory chip business to remain strong because of data center demand from the U.S. and Chinese markets.
“For NAND, demand remained robust on the back of the continuing trend toward higher density for smartphones and the increase in demand for server SSD due to expansion of cloud infrastructure,” Samsung said in a statement. “For DRAM, server demand stayed strong owing to the ongoing shift to higher density and expansion of data center infrastructure. PC demand remained robust.”
For the year, KLA-Tencor shares are up 11%, Lam shares are up 3.6%, Applied Materials shares are down 4.7%, and ASML shares are up 24%. In comparison, the PHLX Semiconductor Index SOX, +0.96% is up 9.5%, while the S&P 500 index SPX, +0.62% is up 5.4% and the tech-heavy Nasdaq Composite Index COMP, +0.76% is up 11%. Shares of KLA-Tencor have been lagging behind the SOX index for the year since mid-March, according to FactSet.
Analyst commentary following KLA-Tencor’s earnings shored up the recovery story in the chip-equipment space. Of the 17 analysts that cover KLA-Tencor, 11 have buy ratings and six have hold ratings. Following KLA-Tencor’s earnings, six analysts raised their price targets resulting in an average target of $134.57, according to FactSet.
Evercore analyst C.J. Muse, who has an in-line rating on KLA-Tencor, raised his price target on the stock to $130 from $120.
“Given this backdrop coupled with comments suggesting a CY4Q18 shipment recovery, a likely pickup in share repurchases in the current Q, and relative short interest coming in, we continue to look for KT to outperform this earnings season,” Muse said in a note.
Cowen analyst Krish Sankar, who has an outperform rating on KLA-Tencor, raised his price target to $148 from $140, pointing out that KLA-Tencor, like Lam, is also expecting the September-ending quarter to be a trough with improving DRAM demand providing a tailwind for the December-ending quarter.
KLA-Tencor is somewhat better positioned than its competitors, said Needham analyst Y. Edwin Mok, who has a hold rating on the stock. Mok said “it appears KLAC is seeing multiple drivers (wafer manufacturing, reticle inspection, EUV and China) coming from its more diversified customer base than that of other front-end SemiCap peers.”
“This unique position allows KLAC to outperform its peers in CY2018 with a strong exit to the year, although we see some risks that some of these drivers might start to moderate in CY2019,” Mok said.
CFRA Research Angelo Zino, who has a buy on KLA Tencor and a $125 price target, said he expects 7-nanometer manufacturing — the kind that appears to be allowing chip maker Advanced Micro Devices Inc. AMD, -4.53% to give Intel Corp. INTC, +1.14% a run for its money — to be a driver.
“Although we anticipate a sequential revenue decline in the Sep-Q to reflect recent memory push-outs and slowing logic investments, we see a sharp rebound in the Dec-Q,” Zino said. “We see growth drivers on the horizon including the early ramp of the 7-nanometer (nm) devices from foundry customers as well as high demand in the bare wafer market to address capacity growth in memory and China.”
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