Favorable Near-Term Catalysts for KLAC, Upgrading to Buy

4/6 - "We think several near-term catalysts are likely to develop against a cyclical backdrop that we think is increasingly favorable. While memory is not without further downside risk, we think it represents only ~15% risk to orders and, with $0.50/Q trough EPS, at $40 the stock is already discounting this scenario. Upgrading KLAC from Hold (2H) to Buy (1H) w/$56 target, see C2008 EPS $2.48 (Street $2.38) and C2009 $3.93 (Street $3.07)."

"While orders slipping for some peers, checks suggest KLAC should surprise to the upside in both FQ3:08 (Mar) (orders flat to -5%, or on upper half of guidance range) and FQ4:08 (Jun) (orders up vs. industry down ~10%)...Based on our work, we think a depressed stock price, an ROIC exceeding cost of capital in a big cyclical trough, and an improving investment grade debt market could allow KLAC to finally add some leverage to its balance sheet. Given current conditions, we estimate KLAC could add anywhere from $0.20-0.35/yr to EPS (~15% accretive to consensus C2008 EPS) by doing a deal even at a 10% stock premium."