Analysts' Choice: Lam Looks Like A Lion

3/20/2017


  Recent Price
$124
  Dividend
$1.80
  Yield
1.4%
  P/E Ratio
18
  Shares (millions)
184
  Long-Term Debt As % Of Capital
21%
  52-Week Price Range
$124.17 - $72.00

Semiconductor-equipment maker Lam Research ($124; LRCX) credits its success to long-term thinking, focusing on three- to five-year trends rather than near-term market forces. Of course, a lot of companies say such things, but Lam has history of investing in next-generation technology before the demand for it takes off.

That prescience has paid off in the form of excellent growth. Sales rose 8% over the last 12 months and 17% annualized over the last three years, while per-share profits increased 14% and 39%, respectively. The consensus projects growth of 33% in sales and 45% in per-share profits for fiscal 2017 ending June, followed by small sales and profit declines in fiscal 2018. The 2018 targets seem too conservative for a company with such a powerful growth engine.

We rate Lam a Focus List Buy and a Long-Term Buy. The shares trade at 18 times trailing earnings, 19% below their industry median and 20% below their own five-year average.

Strong, savvy player

The company holds a 53% share of the market for semiconductor-etching equipment, a 20% share in deposition, and an 18% share in cleaning. That type of influence allows Lam to throw its weight around, both in terms of research and development (knowing and influencing what customers want) and cross-selling (offering products for various segments of the semiconductor-manufacturing cycle). Lam said it expects to see its market share expand in 2017 at the highest rate in at least three years.

Lam's end markets are constantly changing, and successful players learn to change with them. Here are a few trends Lam expects to drive growth in the next few years:

• Applications with enhanced computing power and storage capacity to accommodate customers operating in the cloud.

• Mobile devices and connected electronics, which often require more memory in a tight space. 3-D NAND, which packs memory cells vertically, is in high demand — Lam sells equipment that makes such microchips. Manufacturers are converting planar NAND to the 3-D version, but Lam says less than 50% of the market's capacity will be converted by the end of this calendar year. That leaves a lot of room for growth.

• Improving demand from China, with Lam likely to see a bigger impact in 2018 than in 2017. Lam says Chinese manufacturers are targeting profitability as well as growth, something that hasn't always been the case. Such a focus on profitability should limit supply/demand imbalances.

Plenty of investors avoid the semiconductor-equipment industry because of its cyclicality. However, Lam says most semiconductor spending has consolidated into the hands of a few big players with a commitment to balancing supply and demand, so the company expects less cyclicality going forward.

In November, Lam boosted its quarterly dividend 50% (it now yields 1.4%) and authorized the repurchase of up to $1 billion in shares (10% of the current stock-market value) over the next 12 to 18 months. 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
Dec '16
2.24
vs.
1.57
32%
110.35
-
93.69
17 - 15
Sep '16
1.81
vs.
1.82
2%
95.77
-
90.68
15 - 13
Jun '16
1.80
vs.
1.50
4%
87.19
-
72.00
14 - 12
Mar '16
1.18
vs.
1.40
-6%
83.51
-
63.10
13 - 10
           
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
5.05
0.72
85.70
-
65.78
17 - 13
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
97
91
71
92
74
69
85

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


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