One of the cheapest stocks in our Large Cap 1000 Stock Screener is Lam Research Corporation (NASDAQ: LRCX).
Lam Research (Lam) manufactures equipment used to fabricate semiconductors. The firm is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process. Lam’s flagship Kiyo, Vector, and Sabre products are sold in all major geographies to key customers such as Samsung Electronics and Taiwan Semiconductor Manufacturing.
A quick look at Lam’s share price history below over the past twelve months shows that the price is up 19%, but here’s why the company remains undervalued.
(SOURCE: GOOGLE FINANCE)
Overview
The following data is from the company’s latest financial statements, dated June 2018.
The company’s latest balance sheet shows that Lam has $4.950 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $610 Million in short-term debt and $1.885 Billion in long-term debt. Therefore, Lam has a net cash position of $2.455 Billion (cash minus total debt).
Financial strength indicators show that the company has a Piotroski F-Score of 8, an Altman Z-Score of 5.24, and a Beneish M-Score of -2.24 All of which illustrate that the company remains financial strong.
If we consider that Lam currently has a market cap of $29.168 Billion, when we subtract the net cash totaling $2.455 Billion that equates to an Enterprise Value of $26.713 Billion.
If we move over to the company’s latest income statements we can see that Lam has $3.218 Billion* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 8.30, or 8.30 times operating earnings. That places Lam squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Lam generated trailing twelve month operating cash flow of $2.656 Billion and had $273 Million in Capex. That equates to $2.383 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 9%.
In terms of Lam’s annualized Return on Equity (ROE) for the quarter ending June 2018. A quick calculation shows that the company had $6.803 Billion in equity for the quarter ending March 2018 and $6.502 Billion for the quarter ending June 2018. If we divide the combined total of both numbers by two we get $6.652 Billion. If we consider that the company has $2.381 Billion in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending June 2018 of 36%.
Other considerations regarding Lam include the company’s trailing twelve month revenue of $11.077 Billion, which is higher than any one of the full-year revenues posted in the past five years. The company’s net income of $2.381 Billion (ttm) is the highest in the past five years and 40% higher than the FY2017 net income of $1.698 Billion. Lastly, Lam’s free-cash-flow of $2.383 Billion (ttm) is 27% higher than the $1.872 Billion recorded for FY2017, and a record high in the past five years.
Summary
In summary, Lam is trading on a P/E of 14, compared to its 5Y average of 23.97**, and an Acquirer’s Multiple of 8.30, or 8.30 times operating earnings. The company has a strong balance sheet with a net cash position of $2.455 Billion and a cash-debt ratio of 1.98. Financial strength indicators show that Lam is financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 5.24, and a Beneish M-Score of -2.24. The company also generates a FCF/EV Yield of 9% (ttm) and has an annualized return on equity of 36% for the quarter ending June 2018. Lam’s revenue of $11.077 Billion (ttm), net income of $2.381 Billion (ttm), and free-cash-flow of $2.383 Billion (ttm) are all record highs in the past five years.
(** Source Morningstar)
Superinvestors Currently Holding Positions In Lam include:
There are a number of superinvestors currently holding positions in Lam including David Tepper, Steven Cohen, George Soros, Joel Greenblatt, Jeremy Grantham, Cliff Asness, Ken Griffin, and Lee Ainslie.
More About The Large Cap 1000 Stock Screener (19.3%)
From January 2, 1999 to November 29, 2017, the Large Cap 1000 Stock Screener generated a total return of 2,797 percent, or a compound growth rate (CAGR) of 19.3 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 320 percent, or 6.3 percent compound.
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