Pair Trade? Lam Research Named Citi's Top Semiconductor Pick While KLA-Tencor Is Downgraded To Sell

In a report published Tuesday, Citi analyst Atif Malik named Lam Research Corporation (NASDAQ: LRCX) as a top pick in the Semiconductor space given the company's "outsized" top-line growth expectations.

According to Malik, 3D NAND spend is expected to rise 28 percent year-over-year on 3D NAND adoption, while DRAM spend will fall 5 percent year-over-year and foundry spend will also fall 2 percent year-over-year. With that said, the analyst stated that Lam Research offers investors the "best pure play" on 3D NAND spend as the company will see growth on higher deposition and tech spend on 3D NAND.

Malik is estimating Lam Research to report revenue of $1.475 billion its fourth quarter report and earn $1.50 per share. Both these figures are above the Street's estimate calling for a revenue of $1.4615 billion and earnings per share of $1.47.

Malik maintained his full year calendar 2015 earnings per share estimate of $5.04, but lowered his calendar 2016 earnings per share estimate to $6.25 from a previous $6.48 due to expectations for a two point lower gross margin and one point lower operating margin.

Malik concluded that Lam Research's stock multiple should expand on improving non-memory mix and close its gap with the group as shares have traded in the 7-12x P/E range on peak earnings per share over the past few five years. The analyst suggested that the stock's P/E multiple is poised to expand on improved execution, growing logic share (where the company has historically been weak) and above-average wafer fab equipment (WFE) growth.

Shares were maintained a Buy rating on Lam with a price target lowered to $97 from a previous $100.

KLA-Tencor Downgraded To Sell, Further Downside Expected

Concurrent to naming Lam Research a top pick, Malik downgraded shares of KLA-Tencor Corp (NASDAQ: KLAC) to Sell with a price target slashed to $45 from a previous $66.

Malik offered three reasons to support a bearish thesis in which shares of KLA-Tencor have further downside despite an already 26 percent drop year-to-date.

First, KLA-Tencor has an above 10 percent exposure to Intel Corporation (NASDAQ: INTC) which ranks as the highest in the group. The analyst stated that negative revisions at Intel, coupled with a delay of 10nm technology will impact the company "more than the rest of the group."

Second, KLA-Tencor is "under growing" the WFE market due to higher rates of re-use and lower sampling of inspection products at its "leading edge" nodes that could drive multiple contraction.

Finally, despite the company's dividend yield approaching 4 percent, the analyst does not see the yield supporting the stock even at its current "elevated level."