Joel Greenblatt (Trades, Portfolio) is founder and managing partner of Gotham Asset Management, LLC. He is also an adjunct professor with Columbia Business School.
Greenblatt tries to find cheap and good companies. He looks for value with a catalyst. Greenblatt likes special situations and thinks that they are simply different places to find cheap stocks. In his own hedge fund, Greenblatt uses the basic principles in the Magic Formula: Look for high ROC and high earnings yield. He tries to figure out what "normalized earnings" will be 3-4 years into the future. Greenblatt makes sure the stock is very cheap based on normalized earnings.
Last quarter, he increased his holdings in Lam Research (LRCX, Financial) by buying 167,812 shares. As of March 31, 2015, he was holding 173,423 shares of the company. The following chart shows his holding history in the company.
Lam Research recently posted better-than-expected results, and the stock has seen a good run up of over 13% post earnings report. 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.
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