Lam Research (LRCX) recently posted better-than-expected results, and the stock has seen a good run up of over 10% post earnings report. The company is one of the top picks recommended by Credit Suisse (CS, Financial). Commenting on the results a Credit Suisse analyst wrote,
"In addition, strong C1H15 shipments imply that even with 10-15% H/H decline in C2H15 shipments, LRCX will beat street revenues/EPS estimates in C2H15.
"We continue to maintain LRCX as our top pick and expect the Company to outperform peers over next 3 years, driven by higher exposure to growth segments of WFE, namely (i) 3D NAND (ii) Multi-patterning, and (iii) TSV."
Lam Research is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. The company design, manufacture, market, refurbish and service semiconductor processing systems that are used in the fabrication of integrated circuits. Lam Research's market-leading products are designed to help its customers build smaller, faster and more power-efficient devices that are used in a variety of electronic products, including cell phones, tablets, computers, storage devices and networking equipment. The company's products include Plasma Etch, Thin Film Deposition, single Wafer Clean and Photoresist Strip.
The company’s customer base includes leading semiconductor memory, foundry and integrated device manufacturers that make products such as DRAM, NAND memory and logic devices. In fiscal years 2014, 2013, and 2012, three customers, Samsung Electronics Company, Ltd. (SSNLF), SK Hynix Inc. (HXSCL) and Taiwan Semiconductor Manufacturing Company, Ltd. (TSM), each individually represented greater than 10% of the company's total revenues.
The company spends considerable amount on research and development. The company's R&D expenses during fiscal years 2014, 2013 and 2012 were $716.5 million, $683.7 million, and $444.6 million, respectively. The majority of R&D spending over the past three years has been targeted at deposition, etch, single-wafer clean, and other semiconductor manufacturing products.
The company's primary competitors include Tokyo Electron (TOELY), Applied Materials (AMAT), Dainippon Screen Manufacturing Co., Semes, ASM International (ASMI) and Wonik IPS.
The company has seen good growth in its topline from FY2012 to FY2014. Its topline has increased from $2.6 bn in FY2012 to $4.6 bn in FY2014. In addition to organic growth and market share gains, the company's results also benefited from its acquisition of Novellus Systems, Inc (NVLS). The company's EPS decreased from FY2012 to FY2013 due to one time integration cost of Novellus. However, it again increased meaningfully from FY2013 to FY2014. For the current year analysts are expecting the company to post an EPS of $4.99.
Going forward, the company's focus is to gain market share with a focus on atomic level control in deposition and etch process, prioritize employee organization and business system development to enable scaling and deliver profitability required to fund growth.
The company also has significant market expansion opportunity in WFE markets going forward. Prior to acquisition of Novellus, the company competed for 19% of WFE market with its standalone etch and clean product portfolio. Subsequent to the addition of the deposition portfolio post merger, the company competed for 25% of WFE at the date of Lam-Novellus merger closing. On the three-year anniversary of announcing that deal (June 2015), the company will have a product portfolio that will compete for approximately 28.5% of WFE while by 2017 this number will increase to more than 30%. So, there is a meaningful market share gain opportunity which combined with market share gains, can provide a meaningful upside for the company going forward.
In addition to good growth prospects, management's willingness to return capital to the shareholders also makes Lam Research a good buy. Last year, the company established a $1 billion capital return program which included the institution of Lam Research's first-ever quarterly dividend program.
Lam Research is trading at a P/E of 15x which is a discount to its peers like Applied Materials which has a P/E of 25.70 and ASML Holding (ASML), which has a PE of 35.10. The company's top line is expected to grow 13% in the current year and 9% next year. Analyst opinion is overwhelmingly positive about the company and out of 20 analysts covering the company 18 have buy ratings. I believe the company is a good buy given its strong growth prospects and relative undervaluation.
