Lam Research Corp (NASDAQ:LRCX)

MFI top 50 screener match. The broad thinking is that semis are entering a cyclical downturn, so P/Es are extremely low across the board (as evidenced by Trailing P/E 6.6, Forward P/E 10). But LRCX has a ton of cash on hand to weather the downturn.

EV/EBITDA = 3.8, $2B of cash on hand with only $750M of LT debt.

Cons: 3.8% of the float is sold short, no insider buying.

Low P/E
545m cash and 17m LTdebt
Recovering sales
P/FCF=7.5
P/S=1.6
PEG=0.9

10 of 10 at moneycentral stockscouter.

Magic Formula + Insider buying

low multiples, good balance sheet, high return business.

Will outperform the market over the 5 year haul. Next couple years could see a cyclical slowdown.

However, this is a strong growth company and financially strong. If semiconductors see increased need from the march of consumer electronics, consider it an outperform over the next 1-2 years as well.

Value is 63

Lam Research (LRCX) is a semiconductor equipment supplier, one of several currently on the Magic Formula Investing (MFI) screens. Lam focuses on two particular parts of the manufacturing process: etch and clean. The company uses a highly outsourced model of manufacturing, which allows high returns on capital and rapid response to market conditions, allowing quick ramp-up or slow-down of supply. With this model, and excellent competitive positioning, it sports some of the best operating margins in the industry.

Semiconductor manufacturing is a complex process, but let's try to break it down into something more simple for the purpose of looking at Lam. The etch and clean steps are closely related. Etch refers to removing portions of material layers placed on top of silicon wafers in order to create integrated circuit patterns. The clean step then follows, removing the leftover particles and residues from the etch step. One way to think of it is chiseling a stone tablet. Etch would be the chiseling, while clean would be brushing off the stone pieces and powder left over.

Lam's Exelan and Versys products have a very solid market share in their segments. Lam boasts about 54% market share in the etch equipment sector, and nearly 30% in single wafer clean. The company has continued to gain share in both areas over the past few years. Its main competitors are the large full-line equipment suppliers, notably Applied Materials (AMAT) [Premium Content] and Tokyo Electron. While these firms have been focused on taking business in etch and clean, they have failed to make much inroads as of yet, and chip equipment is a business with fairly high switching costs and customer loyalty. Lam's competitive position is strong.

Lam also boasts a very impressive balance sheet, which is paramount for such a cyclical industry. Over $1 billion in cash dwarfs the approximately $21 million in debt. Free cash flow is strong, averaging 15% of revenues over the past 5 years. Normalized return on capital is outstanding at a 70% average 5-year rate. I'm also really impressed with Lam's stability in a volatile industry. Aside from fiscal (June) 2009, in which Lam posted a loss along with everyone else in the sector, operating margins have remained stable between 20-30%.

Finally, growth prospects look good over the next year or so. A solid cyclical rebound off of 2009 is underway. Lam's Q2 showed a 79% year-over-year increase in revenues, and solid quarter-to-quarter growth as well. Expectations for fiscal 2011 show a 53% growth in sales and almost 90% in operating profits. Management estimates that several of its end-markets are set for major growth this year, particularly NAND flash which is needed for smartphones and tablets. Industry analysts predict flat to 10% growth in overall chip equipment spending in 2011.

The primary risk is a easing of chip capacity expansion, which would likely be triggered by a significant slowdown in smart-phone sales and/or a failure of the emerging tablet market to sell up to expectations. Customer concentration is also somewhat of a concern, with Samsung, TSMC (TSM), and Toshiba making up half of sales. Intel (INTC) [Premium Content] , the world's largest chip-maker, does not do business with Lam.

Clearly, 2011 results will be robust. However, it is only reasonable to assume that year-over-year growth in smartphone shipments will moderate by the end of the year. Equipment spending is an early cycle activity. Following 90% growth for 2011, I model flat results for 2012, followed by a typical cyclical downturn for 2013 before a rebound and better-than-average growth over the long-term. Using those assumptions, and accounting for Lam's historical multiples, I think the stock is worth about $63 a share. That's about 19% above where it trades today.

That is a decent margin of safety, and with Lam's very good business profile, I'm giving the stock a "thumbs up" to interested Magic Formula investors. However, the uncertainty of the business cycle and relatively modest upside keep it out of Top Buy consideration.

dreman/lak/A/6.4b

good cashflow, growth rate, good forward P/E

Profile
Lam Research Corporation
4650 Cushing Parkway
Fremont, CA 94538
United States - Map
Phone: 510-572-0200
Fax: 510-438-4777
Website: www.lamresearch.com

Details
Index Membership: S&P 400 MidCap
S&P 1500 Super Comp
Nasdaq 100
Sector: Technology
Industry: Semiconductor Equipment & Materials
Full Time Employees: 3,300

Business Summary

Lam Research Corporation engages in the design, manufacture, marketing, and service of semiconductor processing equipment used in the fabrication of integrated circuits. It offers etch products, including dielectric; conductor; micro-electromechanical systems and deep silicon; and three-dimensional integrated circuits, which are used in etching process. The company also provides single-wafer wet clean and plasma-based bevel clean systems, which are used in post-etch/post-strip cleaning and pre-diffusion/pre-deposition cleaning process. Lam Research Corporation sells its products and services primarily to companies involved in the production of semiconductors in the United States, Europe, Taiwan, Korea, Japan, and the Asia Pacific. The company was founded in 1980 and is headquartered in Fremont, California.

***All above information from YAHOO FINANCE***

The Semiconductor industry is extremely cyclical. When it's hot, it's hot and likewise when it's cold. LRCX will rebound nicely when the industry picks up. I prefer LRCX over AMAT.

Lots of shares buybacks.

3 to 5 star stock in one year.

magicformulainvesting.com screen at $153M market cap, top 25 companies on June 26, 2008

One of my chip picks along with VSEA & SNDK.

This company is one of 62 listed on the BetterInvesting Growth Screen in January 2008. It met 4 criteria: it is projected by Value Line to double earnings in the next five years, has actually doubled earnings in the past 5 years, is selling at price-earnings multiples (P/E’s) that are 110 percent or less of Value Line’s projected earnings growth rate and has a safety rating of average or better. It was listed in the March 2008 BetterInvesting magazine.

screen p/e < 10 rev growth > 20 earning growth > 20

4 sterne mit steigender tendenz