On its website, Lam Research Corporation (LRCX, Financial) calls itself “a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry.” It adds that its equipment and services let its customers build “smaller and better performing devices.”
Its customers’ products are used in numerous electronic products such as cell phones, personal computers, automobiles and storage devices. Customers include manufacturers of semiconductor memory, foundries and integrated device manufacturers.
Lam Research is based in Fremont, California and its most recent fiscal year ended on June 26. It has a market cap of $44.07 billion, annual revenue of $17.23 billion and 17,700 employees.
Competition
According to Lam's most recent 10-K, the semiconductor capital equipment industry is highly competitive and characterized by rapid change. It lists its competition by product and service lines:
- Dielectric and metals deposition: Applied Materials Inc. (AMAT, Financial)
- ALD and PECVD: ASM International (ASM, Financial) and Wonik IPS.
- Etch market: Applied Materials, Hitachi Ltd and Tokyo Electron Ltd. (TOELY, Financial)
- Wet clean market: Screen Holding Co Ltd. (DINRF, Financial), Semes Co Ltd. And Tokyo Electron.
To remain competitive, Lam explained, “Our ability to succeed in the marketplace depends upon our ability to manufacture and ship products on a timeline that meets our customers’ needs, maintain existing products, and introduce product enhancements and new products that meet customer requirements on a timely basis.”
It also lists its investments in R&D as a key competitive factor, specifically in its ability to generate new products and enhancements to existing products in a timely way. It invested $1.6 billion in R&D in fiscal 2022.
Does this strategy work? Apparently so, because its margins and return on invested capital are all industry-leading.
And yet, the GF Value chart for Lam Research shows that the stock is so deeply discounted that it may be a value trap.
The GuruFocus system warns the company may be a value trap because it is so undervalued that we need to be aware of the possibility that investors are selling off for good reasons. However, since this is an automatically-generated metric, it is not infallible. Some points in favor of Lam Research being a value opportunity instead of a value trap include the following:
- Operating income is roughly 29 times as high as interest payments.
- The Altman Z-Score is 6.5, which is considered safe from bankruptcy.
- It is a solid value creator, with the return on invested capital far higher than the weighted average cost of capital.
- The company has one of the highest GuruFocus profitability rankings for the semiconductor industry.
- It has industry-leading revenue, Ebitda and earnings results.
- It has enough funds to pay a growing dividend and repurchase shares.
The stock also has one of the highest GF Scores available, scoring well on growth, profiability, GF Valoue, momentum and financial strength ranks:
Let's take a look at the breakdown of the five components of the GF Score to see why I believe Lam Research is a value opportunity and not a value trap.
Valuation
Since the price-to-GF-Value ratio indicates that Lam Research might be a value trap, the stock earns only an 8 out of 10 GuruFocus valuation rank. The valuation rank is based on a historical study by GuruFocus comparing how well companies' stock prices tended to perform on average based on their price-to-GF-Value ratios.
Undervaluation also shows up in the PEG ratio of 0.41.
The discounted cash flow calculator shows a shocking 67% margin of safety using the assumptions detailed below:
I have estimated the next 10-year growth rate to be 20.00%, which is less than half of its historical EPS without NRI growth rate of 42.01% during the past decade, along with an 11% discount rate.
Profitability
Lam’s profitability gets top marks for every metric shown below, except gross margin, and overall, it earns a full 10 out 10 ranking from GuruFocus:
The company's net margin has grown relatively consistently over the past decade:
Financial strength
Based on its interest coverage ratio, debt-to-revenue ratio and Altman Z-Score, Lam earns a 7 out of 10 financial strength ranking:
For fiscal 2022, the balance sheet shows long-term debt of $4.958 billion and short-term debt of $7 million. It also reports revenue of $17.23 billion, giving it a debt-to-revenue ratio of 0.29.
Turning to the last line in the table, we see the company is a solid value creator. Its WACC is 8.33%, while its ROIC is 46.6%. That augurs well for future earnings and capital gains.
Growth
Lam racks up another perfect GuruFocus ranking for growth, based on its three and five-year revenue growth rates, its five-year Ebitda growth rate and the predictability of its five-year revenue:
There is no lack of momentum on either the three or five-year revenue charts:
Over the past five years, Ebitda has grown by an average of 17.62% per year, and as the chart above indicates, its five-year Ebitda growth has been reasonably consistent.
Turning to earnings, we see the earnings per share without non-recurring items three-year growth rate is greater than its revenue growth rate. That’s reassuring because it signals the company is becoming more profitable.
The 10-year EPS growth rate is also impressive:
Because of significant slumps in fiscal 2020 and 2022, its five-year free cash flow record is less impressive. Over that period, the average growth rate per year was 6.33% while its 10-year growth rate was 24.29% (those recent slumps affect the five-year rate more than the 10-year rate).
Momentum
Lam's momentum rank is 8 out of 10.
Dividends and share repurchases
Long-term shareholders have been rewarded with more than capital gains, they also receive a dividend, and the company buys back its own shares from time to time.
Because the share price has declined so far this year, the dividend yield is meaningful. At 1.87%, it is just above the S&P 500 average yield of 1.70%. The company has raised the dividend over the past decade:
Although the dividends per share have grown, there’s still lots of room for further growth because the dividend payout ratio is just 0.18.
Regarding share buybacks, Lam has been ambitiously buying shares back over the past five years, at an average rate of 5.72% per year.
Gurus
Lam is quite popular among the gurus, with 13 holding positions in the stock at the end of the second quarter. The three largest positions are:
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management holds 1,992,889 shares after adding 4.75% in the second quarter.
- Frank Sands (Trades, Portfolio) of Sands Capital Management held 1,877,199 shares after adding 43.01%.
- Jeremy Grantham (Trades, Portfolio) of GMO LLC reduced his firm's holding by 0.88% to finish June with 752,008 shares.
Institutional investors are also fans of the company; they hold 88.25% of the shares outstanding. Insiders own 1.38 million shares, or 1.01% of shares outstanding.
Conclusion
Lam Research Corporation has delivered exceptional returns to long-term shareholders over the past decade, and there appears to be no reason why it cannot thrive over the next five or 10 years in my opinion. Its free cash flow is quite uneven, but it does have the right ingredients to raise capital for expansion. The stock price is well below the highs it hit last year, making it a potential bargain opportunity.
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