Citi Downgrades KLA Tencor Despite Strong Results

Shares of KLA-Tencor Corp (NASDAQ: KLAC) were down about 2 percent on Friday after the company reported better than predicted fiscal third quarter financial results, but provided guidance below expectations. Citi analysts Atif Malik and Amanda Scarnati downgraded the stock from Buy to Neutral on “Higher Foundry Inspection Equipment Re-Use.”

The analysts also trimmed their price target from $80 to $66, and cut 2015 and 2016 estimates to reflect the higher foundry equipment re-use. They now expect EPS of $2.07 (versus a previous $2.28) for 2015, EPS of $4.20 (down from $5.10) for 2016, and EPS of $4.59 (down from $5.89) for 2017.

While the firm remains constructive on the semiconductor equipment group, “with C15 WFE to grow +11% Y/Y led by Samsung (+12%Y/Y),” they model KLA-Tencor’s top-line growth “below total WFE market or +4% Y/Y.” Citi still expects “deposition/etch equipment makers like LRCX/AMAT to outgrow the market.”

According to the analysts, fundamentally, when the above is coupled lower memory share, the company’s foundry opportunity is “getting hurt from elevated inspection equipment re-use across multiple or 28nm/20nm/14nm technologies."

The higher foundry equipment re-use augments volatility in KLA-Tencor’s outlook, the report explains. The analysts say they could become constructive if they say “pull-in of 10nm activity and/or lower inspection re-use at Intel and TSM.”