IT Hardware Stocks

Lam Research Corp Valuation – April 2019 #LRCX

Company Profile (excerpt from Reuters): Lam Research Corporation, incorporated on October 8, 1989, 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). The Company operates through manufacturing and servicing of wafer processing semiconductor manufacturing equipment segment. The Company’s 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. The Company’s 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. The Company 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. The Company also offers a range of services, including customer service, spares, upgrades, and refurbishment of its deposition, etch and clean products. The Company also provides refurbished legacy products.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of LRCX – April 2019

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 $29,332,951,738 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.39 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
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 259.29% Pass
6. Moderate PEmg Ratio PEmg < 20 18.10 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.34 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 3.39 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.35 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 $10.63
MG Growth Estimate 15.00%
MG Value $409.23
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $154.13
MG Value based on 0% Growth $90.35
Market Implied Growth Rate 4.80%
Current Price $192.35
% of Intrinsic Value 47.00%

Lam Research Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with 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 $2.9 in 2015 to an estimated $10.63 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.8% 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 $110.67. The company pays a dividend of $2.55 per share, for a yield of 1.3% Its PEmg (price over earnings per share – ModernGraham) was 18.1, which was below the industry average of 35.4, 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 $14.98.

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) $14.98
Graham Number $110.67
PEmg 18.10
Current Ratio 3.39
PB Ratio 5.34
Current Dividend $2.55
Dividend Yield 1.33%
Number of Consecutive Years of Dividend Growth 5

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $7,355,845,000
Total Current Liabilities $2,166,837,000
Long-Term Debt $1,813,190,000
Total Assets $10,768,458,000
Intangible Assets $1,736,468,000
Total Liabilities $4,927,086,000
Shares Outstanding (Diluted Average) 162,170,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $12.98
Jun2018 $13.17
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $10.63
Jun2018 $8.63
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

Recommended Reading:

Other ModernGraham posts about the company

Lam Research Corp Valuation – June 2018 $LRCX
Lam Research Corp Valuation – September 2017 $LRCX
12 Best Stocks For Value Investors This Week – 7/1/16
Lam Research Corp Valuation – June 2016 $LRCX
19 Best Stocks For Value Investors This Week – 1/9/16

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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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