Opening a Tech Position and Trimming Another
We are going to add a new technology name in the fund this morning with 1,000 shares of Lam Research (LRCX) at $41.56. We are going to sell 900 shares of Juniper Networks (JNPR) , and we plan to sell the rest into strength, at $22.79.
We recognize that Juniper is cheap and that it has a product cycle coming, but the revenue contribution from those products now looks like it won't be meaningful until late 2012 into 2013. We have had this rated a Three, and it has been our least-preferred tech name in the fund for a while. So now that shares are up 12% year to date, we'll take this position down and put it into Lam Research, which has nearer-term catalysts.
We also continue to like our other tech positions such as EMC (EMC) (see our Alert from earlier this week on its security division upside), Broadcom (BRCM) , the smartphone play, and Apple (AAPL) , the hottest product cycle story out there. We also still like IBM (IBM) , but since it has rallied 7% year to date, we're not adding to this position here.
Lam Research is the leading player in the etch market in the semiconductor equipment market. Etch is one of the most important steps in the semiconductor fabrication process -- it's where circuits are formed by the selective removal of material. Etch will grow faster than the overall semiconductor industry because of the continuing decline in transistor sizes and because of the increasing layers and complexity in chips. These trends will drive the need for the latest generation of etch tools and for additional steps in the manufacturing process.
Lam Research is well positioned with its customers, foundries and memory makers. The semiconductor cycle has started to turn in conjunction with the stronger economy, and this had led to higher utilization rates and a recovery to bookings (although we believe the first half of 2012 will remain sluggish). Lam's dominant size and scale advantage enable it to continue to outspend its peers on R&D to maintain its technology advantage, and it is in an excellent position to capitalize on the improving macro trends. It also has the lowest cost structure with the most efficient manufacturing facilities and outsourcing strategy, and that makes it one of the most profitable companies in the industry, with the highest operating margins.
Management is known to make smart, strategic acquisitions like the one it made in 2008 with SEZ, which bolstered its share in etch and the clean equipment market, in which it also is now the leader. In December 2011, the company announced the huge $3.3 billion stock deal to acquire Novellus. We like this deal strategically: The companies have complementary products and technologies that don't overlap -- Lam Research dominates etch and clean, and Novellus leads in deposition. The acquisition combines two world-class customer lists and provides strong technology synergies.
The technology improvements from combining etch and deposition is what we are most excited about -- this gives the company a superior product with better pricing. Earnings before synergies are expected to be $4 a share, putting the valuation at a very attractive level. The deal is expected to close in the second quarter, and as the date approaches we expect shares to increase into the completion. We also expect to see the resumption of its buyback program ($1.6 billion) after the deal closes. Our target is $50.
After our trades, we'll own 2,000 shares of JNPR, or 1.5% of the portfolio, and 1,000 shares of LRCX, or 1.36%.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long LRCX, JNPR, BRCM, AAPL, EMC and IBM.
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