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Lam Research: A high-quality company in a rapidly expanding sector.

Opdateret: for 1 dag siden

Lam Research operates in the fast-growing semiconductor industry. In the industry, the trend is that semiconductors are becoming more complex. This trend of rising device complexity is especially beneficial to Lam Research as it drives greater deposition and etch intensity, areas in which Lam Research excels. Thus, Lam Research could be a great long-term investment. However, the question remains: is now the right time to purchase shares? This is what I will investigate in this analysis.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Lam Research. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Lam Research' competitors either. Thus, I have no personal stake in Lam Research. If you want to purchase shares or fractional shares of Lam Research, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Lam Research was founded in 1980 in California, United States. Lam Research designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. Lam Research specializes in manufacturing equipment for etching, deposition, and polishing processes. Etching is a process that removes material to create integrated circuit patterns, while deposition involves adding material layers. In short, Lam Research's equipment enables customers to construct smaller and higher-performing devices. Nearly every advanced chip built today utilizes Lam Research's technology. Lam Research has two revenue streams: Systems Revenue, which involves the sale of equipment, and Customer Support-Related Revenue and Other (CSBG), which includes the sale of spare parts and upgrades. Systems Revenue contributes approximately 61% of the total revenue, while CSBG contributes approximately 39%. Lam Research makes approximately 90% of its sales outside of the United States, with China, Korea, and Taiwan being its largest markets. I believe that Lam Research has a competitive advantage or "moat", as their equipment plays a crucial role in the production of smaller, more efficient, and more powerful semiconductors. This is evidenced by the fact that nearly all advanced chips built today utilize equipment from Lam Research.

Their CEO is Timothy Archer. He joined Lam Research in 2012 as the Executive Vice President and Chief Operating Officer, and he became the CEO in December 2018. Prior to joining Lam Research, Timothy Archer spent 18 years at Novellus Systems, where he held various leadership positions. He holds a bachelor's degree in applied physics from the California Institute of Technology and has successfully completed the Program for Management Development at the Harvard Graduate School of Business. He also serves on the Board of Directors for SEMI, the global industry association representing the electronics manufacturing and design supply chain. He has done a remarkable job at Lam Research. During his tenure as CEO, he has driven revenue growth of more than 50% and an EPS increase of more than 85%. We don't have much information on Timothy Archer, but he seems to be well-liked by his employees as he scores an employee rating of 83/100, placing him in the top 5% of companies of similar size. Despite the limited information available about Timothy Archer, I am confident in his ability to lead Lam Research due to his extensive experience, proven track record, and positive employee ratings.

I believe that Lam Research has a moat, and I also hold a high opinion of their management. Now, let us analyze the numbers to determine if Lam Research meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history with all figures exceeding 10% for each year. Lam Research has consistently achieved a ROIC (Return on Invested Capital) of over 10% in nine out of the past ten years. The only year with a ROIC below 10% occurred several years ago. Lam Research has experienced a significant increase in ROIC (Return on Invested Capital) since 2018. ROIC has consistently exceeded 20% each year, including during the pandemic, although there was a slight decrease in 2020. Since 2021, the ROIC has consistently exceeded 30% every year, which is fantastic. ROIC decreased slightly in fiscal year 2023, but it isn't something that worries me. Considering that 2023 has been a challenging year for most companies in the sector, it is impressive that Lam Research still managed to deliver a ROIC above 30%.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Overall, the numbers look good. There were years when the equity decreased, but since 2020, the numbers have increased every year. It is also encouraging to see that equity reached an all-time high in 2023. Hopefully, Lam Research will manage to continue the trend of increasing its equity every year moving forward.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising to see that Lam Research has consistently generated positive free cash flow every year for the past decade. Looking at the actual numbers, we see that Lam Research generated its highest free cash flow ever in fiscal year 2023, which is encouraging. Levered free cash flow margin has been slightly lower than usual in two out of the last four years, but reached the second highest level in the past ten years in fiscal year 2023, which is another encouraging sign. The free cash flow yield is slightly lower in fiscal year 2023 than in fiscal year 2022, but it is not as low as the two preceding years. However, the free cash flow yield is still below the ten-year average, indicating that the shares are not trading at a discounted price. However, we will discuss this further in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Lam Research, I found that the company has 1,1 years of earnings in debt. It is within the three-year range, so debt is not something I worry about.

Based on my findings thus far, I believe that Lam Research is an intriguing company. However, no investment is without risk, and Lam Research also has its fair share of risks. One risk is macroeconomics. Lam Research relies on semiconductor production for both selling equipment and providing spare parts and upgrades for current equipment. If there is a prolonged slowdown in the global economy, consumers will purchase fewer products that utilize semiconductors. As a result, Lam Research's customers may produce fewer semiconductors and potentially delay purchasing new equipment or updating old equipment. Lam Research has mentioned that customer utilization of their equipment is currently at very low levels, and they expect this trend to continue in fiscal year 2024. The China Risk. The relationship between the United States and China appears to be deteriorating, resulting in export restrictions on semiconductors to China. As a result, Chinese semiconductor manufacturers have increased their purchases, and Lam Research's revenue from China accounted for 48% of its total revenue in the first quarter of fiscal year 2024, compared to 26% in the fourth quarter of fiscal year 2023. These numbers are not sustainable, as acknowledged by the management of Lam Research. Hence, if sales to China normalize, it could affect the profitability of Lam Research. Furthermore, although Lam Research believes that the current export restrictions to China will not have an impact on their business, it is possible that there may be additional restrictions in the future that could adversely affect their sales in China. Competition. In their annual report, Lam Research mentions that the semiconductor equipment industry is characterized by rapid change and is highly competitive worldwide. They also acknowledge that they face significant competition with all of their products and services. Lam Research expects that its competitors will continue to improve the design and performance of their current products and processes, as well as introduce new products and processes with enhanced price and/or performance characteristics. If Lam Research does not succeed in developing and improving its own products, it could have an impact on its business.

There are also numerous reasons to invest in Lam Research. One reason is that they are operating in a fast-growing market. The semiconductor industry is expected to grow at a compound annual growth rate of 12,2% until 2029. And it is widely expected that semiconductor industry revenue will reach $1 trillion within the current decade. The growth in the industry will benefit Lam Research. Furthermore, Lam Research has mentioned that their growth story is strong and is underpinned by the fact that etch and deposition are fundamental enablers of higher-performance, more scalable semiconductor device architectures. CSBG revenue is growing. Lam Research has been increasing their CSBG revenue to 39% of total revenue in fiscal year 2023, up from approximately 34% in fiscal 2022 and approximately 33% in fiscal 2021. While I haven't been able to find the numbers, CSBG revenue should have higher profit margins than System revenue. Furthermore, management has mentioned that as technology advances, many of these applications become more resource-intensive because the processes are longer and more demanding. Hence, they believe that we are going to see a rise in both sales and upgrades in the future.

Shareholder-friendly. Lam Research has an ongoing commitment to returning value to its shareholders. They have just announced a 16% dividend growth, which means that since paying their first dividend in 2014, they have now raised the dividend nine times. Management plans to continue delivering annual dividend growth moving forward. Furthermore, Lam Research has also increased shareholder value by repurchasing shares, and the number of outstanding shares has decreased from 162,100 million in 2014 to 132,072 million in 2023. It means that the number of outstanding shares has decreased by more than 18% in the past ten years. Lam Research still has an ongoing share repurchase plan, and it is likely that it will be increased.

Now it is time to calculate the price of shares in Lam Research. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 33,21, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 8% (Finbox expects EPS to grow by 7,7%). Additionally, I have chosen a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on the fact that Lam Research has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $283,56. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Lam Research at a price of $141,78 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 4.941 and capital expenditures were 438. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 307 in our calculations. The tax provision was 598. We have 132,072 outstanding shares. Hence, the calculation will be as follows: (4.941 – 307 + 598) / 132,072 x 10 = $396,15 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Lam Research's Free Cash Flow Per Share at $34,82 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $400.

I believe that Lam Research is an intriguing company, and I also have confidence in its management. Lam Research is facing some short-term headwinds due to macroeconomic factors, but these will improve at some point. Lam Research generates a large portion of its revenue in China, and although the current restrictions should not impact the business, there is a possibility of new restrictions being implemented in the future. Furthermore, Lam Research's latest numbers from China are not sustainable. Even if we do not see more restrictions, many of their Chinese customers have already stockpiled their products. Competition will always be a risk, but it is something that Lam Research has successfully dealt with over time. I believe that Lam Research has much long-term growth ahead of it. The demand for Lam Research's products will only increase in the future. As a result, as the company sells more products, their high-margin CSBG revenue will naturally increase as well. Furthermore, I really appreciate that Lam Research prioritizes its shareholders by being shareholder-friendly. The company's commitment to increasing dividends and repurchasing shares demonstrates their dedication to enhancing shareholder value. I would love to add Lam Research to my portfolio. However, I don't believe that Lam Research will be available at a 50% discount in the near future. But sometimes, you don't need a significant discount to initiate a position in a company. As Warren Buffett once said, "It is better to buy a wonderful company at a fair price than a fair company at a wonderful price." Thus, if I can purchase shares below $600, I will do so, as I will be getting an approximate 25% discount on the Ten Cap price.

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