Lam's Fabulous Fabrication Gear

9/8/2014


  Recent Price
$72
  Dividend
$0.72
  Yield
1.0%
  P/E Ratio
16
  Shares (millions)
173
  Long-Term Debt as % of Capital
14%
  52-Week Price Range
$72.92 - $46.44

Lam Research ($72; LRCX) supplies equipment and services used in the initial stages of the process that transforms blank silicon wafers into semiconductors.

Investor timing is crucial for stocks like Lam because its business depends on the highly volatile and cyclical semiconductor industry. Expansionary periods can be explosive and downturns sudden and severe. In each of the past seven years, Lam's annual per-share profits and operating cash flow have either risen or fallen by more than 25%. Three semiconductor customers account for about 46% of Lam's revenue.

At the moment, most arrows point up for the stock. Lam, earning a Quadrix Overall rank of 97, is a Buy and a Long-Term Buy.

Business breakdown

Lam's equipment deposits layers of film on silicon wafers, etches tiny, intricate patterns on the surface, and clears residual particles again and again during a fabrication process that can involve a hundred steps.

The company's inventory swelled 32% in fiscal 2014 ended June on a 44% surge in raw materials, likely a bullish signal about near-term prospects. Raw materials typically grow faster than overall inventory when companies receive or anticipate receiving a surge in new orders.

The order backlog on June 30 was $866 million, up 13% from a year earlier. Lam sees a healthy environment for capital spending, projecting industrywide spending on wafer equipment to advance 10% to $32 billion this year. Market-share gains and economies of scale from the $3 billion acquisition of Novellus in June 2012 position Lam to outgrow its industry.

On July 30, Lam said it expects September-quarter sales of $1.1 billion to $1.2 billion, implying growth of 8% to 18% and bracketing the consensus at the time of the announcement. Management added that sales in the first half of fiscal 2015 should resemble those in the second half of fiscal 2014. Those comments suggest December-quarter sales of $1.3 billion to $1.4 billion, up at least 16% from year-ago levels.

For fiscal 2014 ended June, sales grew 28%, well ahead of the 5% increase in research and development expense. Gross profit margin expanded to its highest level since fiscal 2007 on higher volumes and an improved product mix. Free cash flow advanced 2% to $572 million.

Net cash jumped 84% to nearly $13 per share, equaling 18% of the stock price. In April, Lam initiated a quarterly dividend of $0.18 per share and an $850 million stock-buyback plan over the next two years, enough to retire roughly 7% of outstanding shares. The move could signal management's confidence in more predictable cash flows in the future.

Conclusion

Shares have rallied 31% this year, though the trailing P/E ratio of 16 remains 35% below its three-year average. Based on estimated year-ahead profits, the shares sport a forward P/E ratio of 15, about 20% below the median for S&P 1500 semiconductor-equipment stocks.

An annual report for Lam Research Corp. is available at 4650 Cushing Parkway, Fremont, CA 94538; (510) 572-0200; www.lamresearch.com.

LAM RESEARCH
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '14
1.25
vs.
0.80
27%
67.99
-
50.54
17 - 13
Mar '14
1.26
vs.
0.44
45%
57.16
-
48.45
18 - 15
Dec '13
1.10
vs.
0.45
30%
55.47
-
49.54
22 - 20
Sep '13
0.81
vs.
0.53
12%
52.31
-
44.10
24 - 20
           
Year
(Jun.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
4.61
4.42
0.00
67.99
-
44.10
15 - 10
2013
3.60
2.22
0.00
49.13
-
31.17
22 - 14
2012
2.67
2.07
0.00
46.27
-
34.81
22 - 17
2011
3.24
5.89
0.00
59.10
-
35.39
10 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
93
74
90
70
52
94

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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