Lam Research Corporation Quarterly Valuation – March 2015 $LRCX

220px-Lam_Research_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Lam Research Corporation (LRCX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Lam Research Corporation (Lam) is a supplier of wafer fabrication equipment and services to the semiconductor industry. The Company designs, manufactures, markets, refurbishes and services semiconductor processing systems that are used in the fabrication of integrated circuits (ICs). Lam’s products are designed to build devices that are used in various electronic products, including cell phones, tablets, computers, storage devices and networking equipment. The Company’s customer base includes semiconductor memory, foundry and integrated device manufacturers (IDMs) that make various products, such as DRAM, NAND memory and logic devices. Lam offers a portfolio of products that are used in several areas of the semiconductor manufacturing process flow, including thin film deposition, plasma etch and wafer cleaning. These processes, which are repeated numerous times during the wafer fabrication cycle, are utilized to manufacture every type of semiconductor device.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $79.23
MG Value $30.31
MG Opinion Overvalued
Value Based on 3% Growth $44.76
Value Based on 0% Growth $26.24
Market Implied Growth Rate 8.58%
Net Current Asset Value (NCAV) $10.20
PEmg 25.67
Current Ratio 2.88
PB Ratio 2.80

Balance Sheet - December 2014

Current Assets $4,915,000,000
Current Liabilities $1,709,000,000
Total Debt $831,000,000
Total Assets $8,111,000,000
Intangible Assets $2,282,000,000
Total Liabilities $3,110,000,000
Outstanding Shares 177,000,000

Earnings Per Share

2015 (estimate) $4.27
2014 $3.62
2013 $0.66
2012 $1.35
2011 $5.79
2010 $2.71
2009 -$2.41
2008 $3.47
2007 $4.85
2006 $2.33
2005 $2.09

Earnings Per Share – ModernGraham

2015 (estimate) $3.09
2014 $2.61
2013 $1.94
2012 $2.45
2011 $2.96
2010 $1.76

Dividend History


Lam Research Corporation is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings growth or stability over the last ten years, the lack of dividends, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.96 in 2011 to only $3.09 for 2015.  This level of demonstrated growth does not support the market’s implied estimate of 8.58% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Lam Research Corporation (LRCX) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Lam Research Corporation (LRCX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Lam Research Corporation (LRCX) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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