Lam Research Gears Up Astride Chip Equipment Spending

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Spending on semiconductor manufacturing equipment is poised to bloom this year and next as tech companies gain confidence in the global economy and seek cutting-edge technologies for making chips.

With semiconductors going into everything from consumer electronics to cars, the fabrication-gear spending trend lays a favorable foundation for continued growth atLam Research ( LRCX ), an equipment and services provider to the chip industry.

"Business conditions are looking pretty good," Andy Ng, a Morningstar analyst who covers the company, said in an interview.

Ng says investors are bullish on Lam Research's near-term outlook, and he says the company appears favorably exposed to developing tech trends over the next couple years that could boost its odds of producing strong earnings.

Lam Research Chief Financial Officer Doug Bettinger says the company is "wonderfully well-positioned" to capitalize on current conditions, as the equipment and processes it develops are in high demand.

Lam Research makes and services semiconductor processing equipment used to fabricate integrated circuits. Its customers include chipmakers that produce everything from memory to microprocessors, for use in electronics.

Performance In The Process

The stock has surged this year; since Lam Research reported quarterly earnings April 23, shares have risen about 27% to trade around 67. Jefferies Group analysts initiated coverage this month with a "buy" rating and a 75 stock-price target.

Lam Research should see rising product-pricing power, Jefferies analysts say, as chipmaking customers reach a peak in terms of reducing costs and bolstering performance by minimizing the size of transistors. The thinking goes that customers such asIntel ( INTC ) and Samsung will seek advancements from suppliers such as Lam Research to fill a performance-improvement void, via alternative materials and manufacturing process enhancements.

Lam Research is forecast to nearly double its annual earnings per share this year. Analysts polled by Thomson Reuters on average expect $4.40, up from $2.22 last year.

For its third quarter of fiscal 2014 ended March 30, Lam Research logged $1.23 billion in revenue, up 45% year over year and atop analyst views for $1.22 billion.

Profit came in at $216.4 million, or $1.26 a share, on an adjusted basis. That excluded some costs tied to the 2012 acquisition of Novellus Systems and some other special items. The result came in ahead of analyst estimates for $1.17, and compares with EPS of 44 cents a year earlier and $1.10 a quarter earlier.

For the current quarter, the Fremont, Calif.-based firm expects revenue between $1.19 billion and $1.29 billion, and adjusted EPS of $1.14 to $1.28. Analysts in the Thomson Reuters poll anticipate EPS of $1.23 on revenue of $1.25 billion.

Lam Research is the fourth company in size, by market cap, in IBD's Electronics-Semiconductor Equipment industry group, afterASML Holding ( ASML ),Applied Materials ( AMAT ) andKLA Tencor ( KLAC ) . The group is currently ranked No. 72 of 197 that IBD tracks.

SEMI, the global semiconductor industry association, forecasts fab equipment spending will jump 24% to $35.7 billion this year and another 11% in 2015. Such a development would follow double-digit percentage declines logged the last two years.

SEMI's research chief Chris Dieseldorff says the rise of mobile devices, in lieu of PCs that require more semiconductor content, coupled with global economic uncertainty influenced the declines in investment levels the past two years.

"The overall sentiment had an impact on the semiconductor industry," Dieseldorff said in an interview. "Companies just didn't have the confidence to invest."

Renewed Optimism

But now, Dieseldorff says, confidence in the economic vigor of the U.S. and Asia, along with belief in a European recovery, is mounting.

The kind of companies Lam Research caters to are eager to capitalize on cutting-edge processes and willing to make investments in order to boost performance of a range of equipment used to outfit everything from computers to flat-screen televisions.

"We are in the right place at the right time," CFO Bettinger said in an interview.

Dynamic random-access memory (DRAM) equipment spending, for instance, is projected by SEMI to grow 40% this year. Lam Research has a strong position in the memory market. The company's memory segment accounted for about two-thirds of its shipments in the March quarter, and Bettinger says DRAM upgrades developed in collaboration with customers are driving new business.

The DRAM example is just one of many, he says. Demand for tech upgrades is developing on "multiple fronts." And it is coming from regions around the globe.

SEMI predicts that, in 2014, fab equipment spending will surge 36% in the Americas, 69% in China, 79% in Europe and the Mideast, 23% in Korea, and 11% in both Taiwan and Japan.

In its latest reported quarter, Lam Research generated 10% of its revenue in the U.S., 28% in Korea, 22% in China, 19% in Taiwan, 11% in Japan and 6% in Europe.

Chip Cycles

For all the anticipated momentum, Ng of Morningstar notes that Lam Research is in a historically cyclical industry. Investors, he says, tend to push up stocks such as Lam Research when conditions are favorable and expectations are high.

"But when things are bad, everyone runs out the door," he said, noting that Lam Research traded around 35 a share just two years ago and around 25 in mid-2009.

Bettinger says that Lam Research "is not immune" to cyclical shifts.

"The macroeconomic environment is always something we need to be monitoring," he added.

But operating conditions globally range from stable to growing and, against that backdrop, there is likely to be strong and ongoing demand for new electronics, from smartphones to wearable devices, he says. And to satiate that demand, Lam Research's customers are likely to continue to invest in new equipment to develop more and better products for consumers.

"We have a very strong business," Bettinger said.

In addition to a new stock buy-back program, he notes, Lam Research recently announced a 18-cent-per-share dividend slated for July 2. Bettinger calls it a show of confidence by the company's board.

"It will be an ongoing dividend," he said. "It really does reflect confidence in our future business."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: LRCX , INTC , ASML , AMAT , KLAC

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