Buy KLA-Tencor (KLAC) Following Lam Research (LRCX) Merger Termination - Cowen
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Analyst Tim Arcuri commented:
Merger termination is consistent w/the likely outcome we laid out in our 8/29/16 upgrade of KLAC and again yesterday. As we indicated, though the merger was no worse than a 50/50 proposition from a regulatory perspective, the sequence of events suggested to us that customer pushback had developed - most likely from INTC. We felt the parties would ultimately decide that it was not worth the trouble. With respect to LRCX: the fundamental outlook remains incredibly strong with ’17 likely to be another strong year and the stock still trading at an often-difficult-to-explain discount to broadersemi peers.
However, given that we were long-ago proponents of this deal before it happened, if we are intellectually honest with ourselves, we have to admit that we saw KLAC as a key element to the thesis that would drive LRCX’s multiple higher and drive big EPS accretion. Net/net, LRCX will continue to partner with KLAC on inspection and could possibly also try to acquire the necessary inspection capability via other smaller mergers (NVMI? NANO?). With respect to KLAC: we have been advocating that investors get on board as this is the next story in SPE. As KLAC reverts to standalone, this should start to play out; Street models are stale, estimates are about to go way higher, and the relative multiple compression here has been staggering. There is simply no reason why KLAC cannot be a $90 stock without even pushing our assumptions.
Cowen rates KLA-Tencor at Outperform with a price target of $80.
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