Analysts' Choice: Lam Deserves More Credit

5/2/2016


  Recent Price
$81
  Dividend
$1.20
  Yield
1.5%
  P/E Ratio
13
  Shares (millions)
174
  Long-Term Debt As % Of Capital
19%
  52-Week Price Range
$84.39 - $61.20

For the March quarter, semiconductor-equipment maker Lam Research ($81; LRCX) comfortably topped consensus profit estimates and narrowly exceeded expectations for revenue. Its guidance for the current quarter exceeded analyst projections for both earnings and sales.

This type of scenario usually sends shares higher, but Lam's shares have slipped 2% since the announcement. The report was certainly not perfect and raised some legitimate concerns about Lam, but we still rate the stock a Focus List Buy and a Long-Term Buy.

Tempered outlook

First off, Lam noted weak end-market demand for personal computers and lower-than-expected growth for mobile devices. Lam reaffirmed its expectations that industrywide spending on wafer-fabrication equipment should hold roughly flat at $33 billion this year. But its tone appeared more cautious than in January, noting that shipments should be slightly stronger in the second half of the year.

Lam does expect its own revenue to outgrow the market, and we concur. Lam enjoys relatively high exposure to 3D NAND, a type of flash memory that continues to gain momentum over traditional DRAM memory. As a result, Lam has been gaining market share, its shipments rising at an annualized rate of 22% from 2013 through 2015, well ahead of industry growth of 6%. For the 12 months ended March, Lam grew per-share profits 26%, while semiconductor-equipment stocks in the S&P 1500 averaged a 6% decline. Lam's sales rose 16%, versus average growth of 1% for its peer group.

Secondly, Lam's days sales outstanding jumped in the March quarter, due to shipments being back-loaded for the quarter. This could mean that Lam may have slashed prices or offered special financing to meet analysts' sales targets. Encouragingly, management says days sales outstanding should return to more normal levels in the June quarter.

The midpoint of Lam's June-quarter sales target also surpassed the consensus at the time of the announcement. Finally, other checks on Lam's earnings quality look good, including operating cash flow, which has exceeded net income in four straight quarters.

Moreover, operating cash flow dipped 4% last quarter but remains up 65% for the 12 months ended March. Free cash flow surged 81% to $860 million in the past year, boding well for Lam's quarterly dividend, initiated in 2014 and hiked 67% last May.

Investors may also be overlooking the advantages Lam should gain from its pending $10.6 billion acquisition of KLA-Tencor ($72; KLAC), a deal expected to close in mid-2016. The two companies seem like a natural fit; Lam's equipment that deposits or etches away materials on silicon wafers meshes neatly with KLA's products that inspect the wafers after processing. Management expects the deal to increase Lam's per-share profits and free cash flow within the first year, and also expand profit margins.

We expect the stock to rise as these concerns are dispelled. Lam trades at 13 times trailing earnings, a 42% discount to its five-year average and 30% below the industry median.

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
Mar '16
1.18
vs.
1.40
-6%
83.51
-
63.10
13 - 10
Dec '15
1.57
vs.
1.19
16%
81.29
-
63.22
14 - 11
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
           
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
87
50
80
83
62
37
81

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


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