Lam Proves Doubters Wrong

5/4/2015


  Recent Price
$76
  Dividend
$0.72
  Yield
0.9%
  P/E Ratio
16
  Shares (millions)
178
  Long-Term Debt as % of Capital
14%
  52-Week Price Range
$85.70 - $55.40

Lam Research ($76; LRCX), a maker of semiconductor equipment, can be a volatile stock in a volatile industry. Heading into its March-quarter report, Lam's shares had slumped 13% since the end of February, reflecting concerns that customers were cutting capital spending.

Yet Lam's per-share profits jumped 18% on 13% higher revenue, topping analyst expectations. Even more encouraging, management's June-quarter guidance targeted about 13% growth for both earnings per share and sales, exceeding the consensus at the time of the announcement.

Lam's stock surged 8% on the results yet still trades at a discount to peers despite generating stronger-than-average growth. Lam is a Focus List Buy and a Long-Term Buy.

Anatomy of a surprise

The semiconductor-equipment business is highly reliant on the fortunes of Samsung Electronics, Intel ($33; INTC), and Taiwan Semiconductor Manufacturing ($25; TSM), which combine to account for as much as two-thirds of capital expenditures on equipment.

In the weeks leading up to Lam's quarterly report, Intel said it would slash capital spending by 13%, while Taiwan Semiconductor (representing more than 10% of Lam's revenue) announced a 9% spending cut. Making matters worse, Samsung (also more than more than 10% of Lam's revenue) appeared to be postponing orders.

Yet Lam reported record shipments of $1.50 billion in the March quarter, up 20% from the December quarter and near the high end of guidance. Lam is benefiting from its high exposure to gear used to make memory semiconductors, which is undergoing a transition to a new type of flash memory called 3D NAND.

Lam expects June-quarter shipments to rise 4% to 10% from March-quarter levels as higher memory spending offsets a slight decline in foundry spending. Lam also reaffirmed its prior 2015 industry outlook, calling for spending on wafer-fabrication equipment to be flat to up 13% in 2015.

Of course, the quarter was not without its warts. Cash from operations fell 34% to $191 million, slipping below net income of $206 million. This marks the second straight quarter in which operating cash flow lagged net income, which can indicate lower-quality earnings. In addition, operating profit margins declined, while the share count crept up 3%.

More encouragingly, Lam fortified its balance sheet, with net cash jumping 44% to $11.93 per share — translating to 16% of the stock price. The company's quarterly dividend of $0.18 per share, initiated toward the end of April 2014, seems due to be raised.

Conclusion

The consensus expects Lam's per-share profits will rise 17% over the next 12 months, exceeding median forecasted growth of 12% for S&P 1500 semiconductor-equipment companies. Lam's stock trades at 16 times trailing earnings, 24% below its five-year average and 20% below the industry average. Excluding net cash, Lam has a trailing P/E of 13.

An annual report for Lam Research Corp. can be obtained 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
Mar '15
1.40
vs.
1.26
14%
84.49
-
69.07
18 - 15
Dec '14
1.19
vs.
1.10
10%
85.70
-
65.78
19 - 14
Sep '14
0.96
vs.
0.81
14%
77.35
-
66.70
17 - 15
Jun '14
1.25
vs.
0.80
27%
67.99
-
50.54
17 - 13
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
4.61
4.42
0.36
67.99
-
44.10
15 - 10
2013
3.60
2.22
0.36
49.13
-
31.17
22 - 14
2012
2.67
2.07
0.00
46.27
-
34.81
22 - 17
2011
3.24
5.85
0.00
59.10
-
35.39
10 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
81
69
90
61
96
48

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


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