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Lam Research Corp Valuation – September 2017 $LRCX

Benjamin 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 10 Undervalued Stocks for the Enterprising Investor – August 2017.  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 stock analysis showing a specific look at how Lam Research Corp (LRCX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Lam Research Corporation 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). It operates through manufacturing and servicing of wafer processing semiconductor manufacturing equipment segment. Its products are designed to enable its customers build a range of devices that are used in a range of electronic products, including cell phones, tablets, computers, storage devices, and networking equipment. Its customer base includes semiconductor memory, foundry, and integrated device manufacturers (IDMs) that make products, such as dynamic random-access memory (DRAM), negative-AND (NAND) memory and logic devices. It offers a portfolio of products that are used in several areas of the semiconductor manufacturing process flow, including thin film deposition, plasma etch and single-wafer clean.

LRCX Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of LRCX – September 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $27,540,115,960 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.10 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 365.68% Pass
6. Moderate PEmg Ratio PEmg < 20 18.99 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.61 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.10 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $8.88
MG Growth Estimate 15.00%
MG Value $341.73
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $128.70
MG Value based on 0% Growth $75.45
Market Implied Growth Rate 5.25%
Current Price $168.59
% of Intrinsic Value 49.33%

Lam Research Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the  insufficient earnings stability over the last ten years, and the poor dividend history, and the high PB ratio. The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.61 in 2014 to an estimated $8.88 for 2018.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.25% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Lam Research Corporation revealed the company was trading above its Graham Number of $114.82.  The company pays a dividend of $1.65 per share, for a yield of 1%  Its PEmg (price over earnings per share – ModernGraham) was 18.99, which was below the industry average of 41.95, which by some methods of valuation makes it one of the most undervalued stocks in its industry.  Finally, the company was trading above its Net Current Asset Value (NCAV) of $20.58.

Lam Research Corporation performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $20.58
Graham Number $114.82
PEmg 18.99
Current Ratio 3.10
PB Ratio 4.61
Current Dividend $1.65
Dividend Yield 0.98%
Number of Consecutive Years of Dividend Growth 4

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Total Current Assets $9,142,498,000
Total Current Liabilities $2,950,115,000
Long-Term Debt $0
Total Assets $12,122,765,000
Intangible Assets $1,796,668,000
Total Liabilities $5,305,314,000
Shares Outstanding (Diluted Average) 186,425,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $13.90
Jun2017 $9.24
Jun2016 $5.22
Jun2015 $3.70
Jun2014 $3.62
Jun2013 $0.66
Jun2012 $1.35
Jun2011 $5.79
Jun2010 $2.71
Jun2009 -$2.41
Jun2008 $3.47
Jun2007 $4.85
Jun2006 $2.33
Jun2005 $2.09
Jun2004 $0.54
Jun2003 -$0.06
Jun2002 -$0.71
Jun2001 $0.39
Jun2000 $1.53
Jun1999 -$0.98
Jun1998 -$1.27

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $8.88
Jun2017 $5.74
Jun2016 $3.63
Jun2015 $2.90
Jun2014 $2.61
Jun2013 $1.94
Jun2012 $2.45
Jun2011 $2.96
Jun2010 $1.76
Jun2009 $1.54
Jun2008 $3.23
Jun2007 $2.72
Jun2006 $1.39
Jun2005 $0.76
Jun2004 $0.18
Jun2003 $0.01
Jun2002 -$0.04

Recommended Reading:

Other ModernGraham posts about the company

Lam Research Corp Valuation – June 2016 $LRCX
19 Best Stocks For Value Investors This Week – 1/9/16
Lam Research Corp Valuation – January 2016 Update $LRCX
13 Best Stocks For Value Investors This Week – 10/3/15
Lam Research Corporation Analysis – October 2015 Update $LRCX

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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