A Financial Analysis of Lam Research Corp

 

The semiconductor industry evolves technology through incredible companies like Intel and AMD. However, while these two companies may be the most recognizable, there are plenty of other companies in this industry which offer great opportunities for capital gains. These companies have excellent business models, solid valuations, and great growth potential to reward investors for investing beyond the media. One corporation which follows the said guidelines is Lam Research Corporation (LRCX).

Before undertaking the financial statistics of this $7.26 billion corporation, the business model for Lam needs to be examined. According to Reuters, Lam “designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits and is a provider of such equipment to the worldwide semiconductor industry.” While this description is more relevant to the technical-savvy, there are some important implications to take into account. First, Lam is a vertically built corporation. Products are initiated at Lam and processed all the way up to marketing and service. Some of the products Lam creates include Dielectric Etch Products, Conductor Etch Products, Resist Strip Products, and Cleaning Process. These products are leading innovations for the future, and continued capital expenditures will add to even newer products that may provide excellent growth opportunities for Lam. What is also important about Lam’s strategy is its international presence.

Lam “sells its products and services primarily to companies involved in the production of semiconductors in the United States, Europe, Japan, Korea and Asia Pacific.” Such a wide variation of geographical demographics is positive for this corporation. The dollar is decreasing to outstanding lows against other currencies. When this happens, consumers from out of the United States will be more inclined to purchase goods from America because of its relative cheapness. More goods sold equal higher revenue. And higher revenue means potential share price gains. Moreover, interest rates are also falling. This helps the technology sector plenty, because more capital expenditures are possible. Corporations do not have to worry about borrowing too much to fund future projects, because interest rates won’t be a burden. And sequentially, revenues will rise.

To see how true revenues will compare against share price performance, there is no greater place to look than the share price chart. Supporting revenue of $1.642 billion over the past twelve months, Lam saw a share price gain of 30.31%. This mark is phenomenal considering the recent turmoil in the economy and the higher interest rates that lingered for the latter part of 2006. Interestingly, since 2003, only once has Lam fallen in share price during a calendar year. This comes with lots of market uncertainty and many problems lingering in the technology sector. However in 2005, Lam’s share price rose 63% and in 2006, the share price grew nearly 20%. With growth apparent, share price appreciation should not be a thing of the past.

The question now is to determine where the growth is coming from. Over the past year, revenue growth came in at 64.16%. Earnings growth also saw 125.38% over gains from the previous fiscal year. Are these growth patterns good? They are phenomenal. Compared to the industry’s respective growth figures of 9.26% and 27.78%, there is no argument against Lam’s figures. Narrowing the scope down to market-cap competitors, neither Xilinx, Linear Technology, nor National Semiconductor were able to come close to Lam’s figures over the past year. It’s true the five year average of the two respective figures at 1.56% and 16.96% are a bit small, but with continued growth seemingly so rampant and a good valuation number to entice investors, investors need to focus on foresight rather than hindsight with Lam.

Continuing down the income statement, a common-size evaluation will illustrate Lam’s success with margins. According to Reuters, over the past year Lam produced gross margins of 51.23%; operating margins of 30.56%; and net profit margins of 26.42%. It is true that all three of the aforementioned market-cap competitors have higher gross margins, and Linear Technology has higher net profit margin. However, there are a few important considerations to look at. First, each of the shown margins is above the industry averages. The comparison illustrates Lam’s ability to control costs at all levels to earn more profit on the dollar. Second, margins over the past year have improved dramatically compared to Lam’s five year respective averages. Gross margin has improved 14.2%, operating margin has increased 125.5%, and profit margin has improved 146.2%. Compared to another competitor, Xilinx, which saw respective margin increases (or decreases) of -0.9%, -6.7%, and 3.7%, Lam’s figures are phenomenal. At each level of the income statement, Lam is cutting costs and using efficient methods to raise sales at the same time. This process has worked wonders for the company in the past year and has the potential to continue.

However, there is one surprising notion about Lam’s incredible growth. Growth has not been fixed into the share price. Valuation for Lam is incredibly low compared to predictions of future growth. A forward P/E ratio of 11.28 is way below the industry average of 28.23. Forward price to sales of 2.97 is also quite low than the industry’s 4.97 respective figure. Comparing one of these ratios, the earnings multiple, to more market-cap competitors (National Semiconductor: 20.54, Linear Technology: 21.05, Xilinx: 22.12), and a conundrum is formed. How can a company like Lam be so undervalued given that the rest of the industry’s growth is so low—but still has a higher valuation? Either Lam’s competitors will experience a free-fall in share price in the distance future, or Lam itself with see tremendous share price growth to reach an appropriate valuation. Whichever the case (more than likely the latter scenario), Lam is well positioned for at least the short run. Looking at one more statistic, according to Yahoo! Finance, Lam’s PEG ratio is 0.64. This number is extraordinary low. All the aforementioned market-cap rivals only manage a PEG ratio of one or above. Again, Lam is incredibly undervalued given its growth and is consequently the main enticement for this equity.

Nevertheless, there are plenty of other positive statistics Lam contains. The company’s ROE of 43.29% is not only better than the industry average of 15.50%, but better than competitors National Semiconductor and Xilinx. The company has not recently bought back stock, so net profit is the driving mechanism here, creating a wide margin increase for the ROE five year average of 14.57%. In addition, the company is plenty solvent with a current ratio of 3.03. This will bring in even more cash to company that has a very large stash in the first place, as its price to free cash flow of 13.01 is lower than all three the aforementioned corporations. Asset, inventory, and receivable turnover are all near the industry averages—illustrating management efficiency. And the company also supports a 2.05% dividend yield—a rarity for technology companies, and a rarity investors need to capitalize on.

Therefore, after some deliberation, there is plenty of great news associated with Lam Research Corporation. The company is nearly 90% owned by institutional investors—individuals who have studied the markets for a long time. In addition, technical analysis also warrants a great opportunity to buy some shares right now. The share price is just about to overpass a 50 day EMA and 50 day SMA. The MACD indicates a recent convergence to the upside, and an RSI at 50 does not indicate any type of overbought market. So in addition to the technical, fundamental, and business model analysis, there should be some incentive for any investor to at least consider purchasing shares of Lam as a part of a diversified portfolio.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr

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