'A Good Time To Buy Equipment Stocks': Citi Upgrades Lam Research, Updates Sector Model

With most semiconductor equipment makers already having reported earnings, Citi shared its takeaways on the sector and updated its wafer fab equipment model Monday. 

The Analyst

Analyst Atif Malik upgraded Lam Research Corporation LRCX from Neutral to Buy and increased the price target from $220 to $245. 

Buy-rated Applied Materials, Inc. AMAT is Citi's top pick in the space. Citi raised its price target for the stock from $70 to $78. 

Buy-rated KLA-Tencor Corp KLAC is its No. 2 pick. Citi has a $127 price target for the stock. 

MKS Instruments, Inc. MKSI is Citi's top pick in the small-to-mid-cap space. The firm has a Buy rating on the stock with a $130 price target. 

Buy-rated ASML Holding NV (ADR) ASML is Citi's top pick in the European Union. 

In Asia, Citi is positive on TOKYO ELECTRON/ADR TOELY and ASMPT.

The Thesis

After 25-percent outperformance relative to the Philadelphia Semiconductor Index in 2017, shares of the "big three" U.S. semiconductor equipment makers have performed roughly in line with the index, Malik said in a Monday report. Weak memory-spend concerns are largely priced in, the analyst said.

Citi expects NAND equipment spending growth to accelerate in 2019, as memory manufacturers move 92/96-layer 3-D NAND plans from the second half of 2018 to the first half of 2019.

The firm also expects DRAM equipment spending to remain stable this year.

"We model 2019 wafer fab equipment spend of $61 billion, above the Street's $58 billion, and we believe the second half of 2018 is a good time to buy equipment stocks in anticipation of equipment shipments recovery in the first half of 2019," Malik said.

Citi Projects Top-Line Growth At Lam Research

Stable memory investment by Lam Research in 2019 can drive strong top-line growth, Malik said. Despite the company's improving foundry share, its memory sales are still 75 percent on a trailing 12-month basis.

Citi projects that Lam's memory capital expenditures will grow 11 percent and 8 percent, respectively, in 2018 and 2019 and drive the stock higher over the next year.

Applied Materials: A No. 1 Pick 

Applied Materials is best-positioned among equipment makers to capitalize on artificial intelligence, autonomous intelligent machines and future display technologies that facilitate a natural 3-D experience, Malik said.

Citi raised its price target and calendar 2019 earnings estimate for the company to reflect Applied Materials' wafer equipment outlook for 2019.

The Price Action

Lam Research shares were rallying 1.32 percent to $204.21 at the time of publication Monday. Applied Materials shares were up 1.1 percent at $55.44.

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