Analysts' Choice: March To Success With Lam Research

11/30/2015


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  Recent Price
$77
  Dividend
$1.20
  Yield
1.6%
  P/E Ratio
13
  Shares (millions)
174
  Long-Term Debt As % Of Capital
20%
  52-Week Price Range
$85.70 - $61.20

Listen to executives at Lam Research ($77; LRCX), and before long you'll probably hear about the 20-mile march. In 1910, British explorer Robert Falcon Scott and Norwegian Roald Amundsen each strove to plant his country's flag on the South Pole, requiring an overland round trip of 1,400 miles. Amundsen's team arrived first for a variety of reasons, among them consistency. Amundsen intended to march 20 miles a day, regardless of weather conditions or other problems. Scott often pushed his men to march much farther, tiring them out, then didn't travel at all on days with poor weather.

Lam's CEO attributes much of the company's success not only to constant advancement, but also to an unwillingness to reach beyond its grasp. Given Lam's Quadrix Overall score of 98 and its blend of growth and value, we don't consider our Buy and Long-Term Buy rankings an overstretch.

Growth at a good price

In the 12 months ended September, Lam grew sales 20%, per-share profits 30%, and operating cash flow 36%. Lam's core business, selling equipment for making semiconductors, has seen annual sales growth of about 20% over the last three years, more than double the growth rate of the industry. Consistent market-share gains have helped support growth, and the company expects that trend to continue.

Since Lam reported last month that September-quarter profits jumped 21% and topped the consensus for the 11th consecutive quarter, analyst targets for the year ending June have risen more than 4%. Wall Street now expects profit growth of 19% on 11% higher sales in fiscal 2016 ending June, continuing a multiyear growth trend.

Lam has delivered 13 consecutive quarters of double-digit sales growth and gains of at least 14% in five of the last six fiscal years, steadiness that stands out in an industry known for cyclicality. Yet investors need not pay up for that dependability. Lam trades at 13 times expected year-ahead earnings, 48% below the average semiconductor-equipment maker in the S&P 1500 Index.

A strategic purchase

Lam makes gear for manufacturing semiconductors. Its products deposit thin films onto silicon wafers, then etch and clean those wafers. The company has agreed to pay $10.6 billion to purchase KLA-Tencor ($66; KLAC), $5.8 billion in cash and the rest in stock. KLA-Tencor makes products that help identify defects in microchips and assess measurements or textures. Such tasks help accelerate microchip-development cycles and boost manufacturing efficiency.

While Lam believes the combined company will be able to trim $250 million from annual costs 18 to 24 months after the merger, this deal is more strategic than financial. Think of it as a blend of process and process control. The purchase of KLA-Tencor will broaden Lam's range of products, thus providing an edge in the pursuit of large customers, who tend to favor equipment makers that can satisfy a variety of needs at the same time. Lam hopes to close the deal by the middle of 2016.

You can obtain an annual report for Lam Research Corp. 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
Sep '15
1.82
vs.
0.96
39%
84.13
-
61.20
17 - 12
Jun '15
1.50
vs.
1.25
19%
84.39
-
69.56
18 - 14
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
           
Year
(June)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
5.26
5.05
0.72
85.70
-
65.78
17 - 13
2014
4.61
3.97
0.00
67.99
-
44.10
17 - 11
2013
3.60
0.66
0.00
49.13
-
31.17
74 - 47
2012
2.67
1.35
0.00
46.27
-
34.81
34 - 26
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
92
82
87
71
66
66

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


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