Analysts' Choice: A Lot To Like About Lam

10/3/2016


  Recent Price
$93
  Dividend
$1.20
  Yield
1.3%
  P/E Ratio
15
  Shares (millions)
178
  Long-Term Debt As % Of Capital
36%
  52-Week Price Range
$95.77 - $61.65

Business investment in the U.S. has been disappointing this year — except when it comes to semiconductors. New orders for semiconductor-fabrication equipment have topped shipments in the last two calendar months and seven of the last eight, suggesting the type of solid demand that should keep Lam Research ($93; LRCX) plenty busy.

While earnings estimates have been trending higher, the consensus for Lam, a Focus List Buy and Long-Term Buy, still projects growth of 10% in the year ending June 2017 and 6% in fiscal 2018. We expect stronger growth from Lam, which stands out from the crowd for several reasons:

Quadrix scores. Lam's 12-Factor Sector score of 85 and Reranked Overall score of 98 are tops among semiconductor-equipment companies in the S&P 1500. Lam also earns the industry's top scores for Value (79) and Quality (88).

Industry outlook. As semiconductors get smaller and silicon wafers get bigger, the manufacturing process becomes more complex, in some cases requiring three-dimensional designs. These changes require a steady stream of new production equipment, and Lam should capture a healthy share of that business. Over the last six years, Lam's annual sales growth (21%) has more than tripled global semiconductor-equipment sales growth (6%). Lam should continue to outgrow the market.  

New markets. In 2013, Lam could only serve about 26.5% of the market for wafer-fabrication equipment. New products lifted that percentage above 30% in 2015, and more gains are likely in the future. Plus, Lam expects to boost market share 7% to 10% during the transition to three-dimensional flash memory from two-dimensional.

Over the last 12 months, Lam grew sales 12% and per-share profits 26%. In contrast, the average semiconductor-equipment company in the S&P 1500 Index posted a 1% decline in per-share profits. In the wake of that growth, Lam reportedly holds a 14.3% share of the market for semiconductor-manufacturing equipment, second-largest in the industry.

Lam has topped consensus profit targets in 14 straight quarters; in the last three quarters, profits have exceeded expectations by an average of 9%. However, investors have yet to fully reward Lam for its outperformance. At 15 times trailing earnings, Lam Research is the cheapest stock in its S&P 1500 industry, 35% below the industry average and 26% below its own three-year average.

Merger troubles

Lam's planned acquisition of KLA-Tencor ($70; KLAC) has run into antitrust difficulties, which some analysts blame on complaints from customers who oppose the merger. KLA now trades at an 11% discount to the merger price, up from a 1% discount just a month earlier, indicating rising doubt about whether the deal will go through. However, while the KLA acquisition would broaden Lam's product line and help it adapt to customer demands, we just spent several hundred words showing you why Lam is worth buying regardless of whether the deal goes through.

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
Jun '16
1.80
vs.
1.50
4%
83.83
-
72.00
14 - 12
Mar '16
1.18
vs.
1.40
-6%
81.29
-
63.10
13 - 10
Dec '15
1.57
vs.
1.19
16%
79.04
-
61.20
13 - 10
Sep '15
1.82
vs.
0.96
39%
84.39
-
62.85
17 - 12
           
Year
(Jun.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
5.89
6.37
1.20
87.19
-
61.20
14 - 10
2015
5.26
4.57
0.72
85.70
-
65.78
19 - 14
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
80
79
88
65
36
67

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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