Comparatively, the iShares PHLX Semiconductor ETF (SOXX) and the VanEck Vectors Semiconductor ETF (SMH) have risen 32.3% and 34.2%, respectively, in 2019. Let’s look at the valuations, growth, and upside potential of LRCX and KLAC.
LRCX is trading on par with target estimates
Lam Research engages in the design and production of integrated circuits for the semiconductor industry. Similar to other semiconductor stocks, LRCX was severely impacted in the final quarter of 2018, as it fell 13%.
Notably, analysts expect Lam Research’s sales to fall 5.1% to $9.16 billion in fiscal 2020 (ending in June). Plus, they expect its sales to rise 15.7% to $10.6 billion in 2021 and 5.3% to $11.16 billion in 2022.
Notably, the company’s earnings per share are estimated to fall 5.4% in 2020 and rise 29% in 2021. We can see that the stock still has a cheap forward price-to-earnings multiple of 13x, despite its tremendous run in 2019. LRCX also has a forward dividend yield of 2%.
Analysts gave a 12-month average target price of $230.14 for LRCX, which is marginally below its current price of $230.39.
KLA’s semiconductor performance this year
KLA Corp. stands as a market leader in the design and production of improvement procedures for semiconductor processes.
Analysts expect KLAC’s sales to rise 21% to $5.53 billion in fiscal 2020 (ending in June). Plus, analysts expect sales to rise 6.4% to $5.88 billion in 2021 and 2% to $6.07 billion in 2022.
Notably, the company’s earnings per share are estimated to rise 12.3% in 2020 and 14.5% in 2021. The company’s EPS could grow at an annual rate of 14.6% in the next five years.
KLAC stock is trading at a low forward price-to-earnings multiple of 14.6x. Plus, its stock has a forward dividend yield of 1.9%. Analysts have a 12-month average target price of $161.08 for KLAC, which is marginally above its current price of $158.29.
In our view, it’s understandable that analysts aren’t too bullish about the two stocks, as they have already traded close to their 52-week highs. Further, any escalation in the trade war could impact both companies, as they have significant exposure to China. KLAC generates 15% of its sales from China, and 16% of Lam Research’s sales come from China.
Semiconductor industry snapshot
The semiconductor industry is in the midst of a downcycle. Notably, analysts and investors remain cautious as the downturn could impact stocks in the near term. According to MarketWatch’s September 30 report, chip sales have fallen for the eighth consecutive month.
Notably, data from the Institute of Supply Management for September is far from encouraging. The PMI (purchasing managers’ index) stood at a 10-year low of 47.8%, dragging the Dow Jones lower by 300 points yesterday.
ISM noted that computer and electronic product shipments outpaced new orders for the second consecutive month, which doesn’t bode well for semiconductor stocks. In our view, there is a strong possibility of a market correction leading into the fourth quarter of 2019.
A pullback could drive Lam Research and KLAC’s shares lower. We believe that investors should be cautious and reconsider these two stocks at a lower price.