Applied Materials, Lam Research: Long Trade Ideas Heading Into Semicon West Trade Show

Semicon West is the largest semiconductor equipment trade show, and the event is scheduled to be held in San Francisco from July 11 to July 13 this year.

Ahead of this key industry event, which will be held along with Intersolar, Bank of America Merrill Lynch said the semiconductor equipment industry's fundamentals remain strong. While believing that the sell-off has created a particularly attractive entry point, the firm said Applied Materials, Inc. AMAT and Lam Research Corporation LRCX screen the best due to long-term potential and valuation.

Analyst Krish Sankar noted that many of the large cap names such as Applied Materials, Lam Research, ASML Holding NV (ADR) ASML and KLA-Tencor Corp KLAC aren't hosting analysts days at the show, and instead would be hosting individual events.

The smid cap companies would mark their presence at the small cap CEO forum, the analyst added. The analyst also indicated that TOKYO ELECTRON ADR EACH REPR 0.25 SHS TOELY will host its analyst day on July 11, giving some near-term color on industry trends, long-term expectations.

Management Teams To Remain Optimistic

BofA Merrill Lynch expects the management teams to remain optimistic near term and long term on wafer fab equipment and capital expenditure trends. Despite investor worries about macro and/or slowdown in semiconductor demand in the second half of 2017 and the recent sell-off in semiconductor equipment stocks, the firm does not see any risk to near-term numbers.

The firm attributed the management teams' bullish stance on WFE outlook over the next several quarters to continued strength in 3D NAND, the ongoing discussions with the indigenous Chinese companies and the upcoming 7nm logic/foundry/auto investment cycle.

The firm identified the following as the focus at Semicon:

• Semiconductor production equipment industry shipment.
• Technology trends.
• WFE outlook for the second half of calendar year 2017 and calendar year 2018.

AMAT, Lam Research Score On Valuation, Minimal Risk

Justifying its optimistic assessment of Applied Materials and Lam Research, BofA Merrill Lynch said both these stocks have attractive valuations and minimal risk to near-term estimates. The firm believes a re-rating is possible for these stocks due to their similarity to high-quality industrial names and the stickiness of the Services segment.

Applied Materials has the added advantage of being well-positioned in the multi-year OLED cycle.

"Our blue-sky scenario for AMAT suggests $4.41 in EPS in FY19, which is 26% higher than consensus and implies well-over 50% potential upside to the stock from current levels," the firm said.

BofA America rates both Applied Materials and Lam Research Buys.

At the time of writing, Applied Materials shares were rallying 1.78 percent to $41.74 and Lam Research shares were up 1.39 percent at $141.22.

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