Monday, March 7, 2011

Four reasons why LRCX will rebound

Barclays' CJ Muse understands why Lam Research "has been a relative underperformer" of late, due to its lack of exposure at Intel and unfavorable growth vs. opex. But he's optimistic for a turnaround in the stock, for four reasons:
  • Customer mix improving. Spending by foundries and Intel are likely to be frontend loaded in 2011, so look for memory mix of capex to get better as the year progresses. LRCX has its best customer mix in NAND (65%), so look for better business for Lam vs. more logic/foundry-leveraged rivals KLAC and NVLS.

  • Improving margins for clean. Margins for the company's clean technology were in the low 30% in early 2010, improved to ~39% by year's end, and should top ~45% (maybe up to 47%) by the end of 2011, Muse predicts. Why? The fast market upswing actually made it tough for the company to sell its reengineered spin clean products, but this should change as the market winds die down. Also, the company's nine design wins in 2010 should translate into 3%-5% share gains, and there are higher volumes for clean.

  • Market share gains coming. The company's increased opex outlook (~$100M) in the January quarter soured investors, but there's a longer-term ROI reasoning behind it -- Muse says it'll be for building infrastructure to help support imminent growth in etch and clean. Nearly two-thirds of the increased spend is for etch R&D to drive innovation for top customers, he notes, which is a longer-term "good investment;" ~20% is for new work for clean, particularly the re-engineered chamber configuration (medium-term investment); and ~15% is for 450mm, mainly to woo Intel (longer-term) even if it ultimately dents capital intensity. "Add it all up, and we see these investments as an effort to drive the next 5-10 points of share gains in both etch and clean over the next cycle or two," he writes.

  • Multipatterning litho schemes driving etch. After prolonged tinkering with multiple patterning (double and more) litho schemes, the industry should finally start truly adopting this technology in 2H11 and 2012. To this end, look for etch to increase as a percentage of wafer fab equipment spending, Muse notes.
Taking all into consideration, LRCX is trading at a discount "to all of its front-end equipment peers," Muse suggests. He expects a likely March earnings trough followed by consistently ratcheting estimates, and currently pegs a $66 stock price target (11× CY11 EPS estimates), meaning he projects roughly 13% upside.

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