Valens Research - Weekly Equity Idea Highlight - 2018 10 31
LRCX currently trades at an inexpensive 8.8x Uniform P/E (Fwd V/E'). At these levels, the company is trading at the bottom end of the Semiconductor Equipment Segment's Uniform P/E. The market clearly appears to be pricing in a negative cycle for LRCX in the near-term. However, there are several reasons that the market expectation is incorrect and too pessimistic.LRCX has seen sustained Uniform ROA (ROA′) above cost-of-capital in each of the last eight years, and sustained improvement with ROA′ for the past six years, the longest sustained trend in the last 20 years for the company. Often that would be reason for pause for a Semiconductor Equipment company, as these are notoriously cyclical firms. However, LRCX has seen Uniform ROA plateau the past four years, and this stability might be a sign of a
new dynamic for them and their customers that is driving potential for sustained stable strong profitability for the next several years.
The market is pricing Uniform ROA to fall from 34% levels in 2018 and projected 30% levels in 2019 down to 10%, with Uniform Asset growth also slowing to the low end of growth rates over the past seven years, at 10%. The market appears to be too pessimistic.
One of LRCX's core businesses and competitive niches is in the equipment they make for various stages of production for flash storage, including NAND and DRAM. Their end market industry is undergoing rapid sustained growth thanks to demand for storage. Importantly, the industry has become much more concentrated, which benefits LRCX as it has reduced the amplitude of the boom-or-bust competitive cycles the industry goes through, helping smooth LRCX's profitability. Rapidly growing demand for the content their customers produce provides them with confirmed growing demand for their equipment, and a more rational customer base reduces the volatility of that demand, leading to more stability and visibility. It is significant to notice that even as the ROA' at clients like MU have been far more volatile, rising above and falling below 0%, LRCX has had steady returns. MU's pricing environment may be volatile, but their need for equipment to expand capacity is not. Considering the growth window for the industry, LRCX could see sustained Uniform ROA stability going forward.
Lam Research is a supplier of wafer fabrication equipment and services to the semiconductor industry. The company designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company's customer base includes semiconductor memory, foundry, and integrated device manufacturers that make products such as non-volatile memory, dynamic random-access memory, and logic devices. The company's services include customer service, spares, improvement, and refurbishment of its deposition, etch, and clean products. The company sells its products and services to companies in the United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan.
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