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Bull of the Day: Lam Research (LRCX)

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Lam Research (LRCX - Free Report) delivered the "earnings trifecta" on January 24 and shares suffered a stunning reversal of fortune the next day after nearly touching their 52-week high just below $220. I believe this profit-taking is presenting an excellent buying opportunity and this report will explain why.

The triple play of earnings goodness I refer to is both top and bottom lines beats and raised guidance for the current quarter, as well as a generally sunny outlook for the coming year.
Lam reported Q2 FY2018 (ends in June) EPS of $4.34 vs the Zacks consensus of $3.69 for a 17.6% beat.
The company did take a write-down of $757 million to offset tax code changes affecting its over $2.5 billion in overseas cash. So that shows up as an unadjusted loss for the quarter of 6-cents.
Revenue in the December quarter rose 37% year-over-year to $2.58 billion vs. analyst models projecting $2.567 billion.

Guidance, Estimates and the Zacks Rank

Lam Research generates the majority of its revenue in Asia with large customers like Micron (MU - Free Report) and Samsung.

After reflecting on another quarter of record results, Lam Research CEO Martin Anstice said the company expects 2018 to bring "record levels of customer equipment spending and another year of outperformance opportunity for the company."
For the current Q3, Lam management sees revenue in a range of $2.73 billion to $2.98 billion, $200 million ahead (at the midpoint) of the consensus $2.65 billion estimate. EPS is seen in a range of $4.20 to $4.50, versus the Zacks consensus for $3.81.

While LRCX is currently a Zacks #2 Rank Buy, the company's raised guidance will inspire Wall Street analysts to start reworking their models and raise their sales and EPS estimates. Within a few days, we should see the Q3 consensus climb 10-15% and get close to that $4.35 midpoint.

The full fiscal year (ending in June) should see estimates rise over $15, representing nearly 50% EPS growth and keeping the P/E multiple under 14X.

And as top line estimates climb over $10.5 billion, Lam is looking at full-year sales growth of over 30%.
CEO Anstice also noted that "semiconductor innovation is contributing increased value in a data-driven economy and we believe that trend is quite fundamental, exciting and sustainable."
This sounds exactly like the outlook of my December 11 special report for Zacks Confidential, The Technology Super Cycle, where I recommended LRCX shares under $185.
Value in Chips?
The recent 2018 Barron's Roundtable had as one of its stock-pickers Scott Black, founder of Delphi Management and an old-school value guy. Here's what he said about why you own the Lam...

"It is a powerhouse in semiconductor capital equipment, and its products are used primarily in front-end wafer processing, which is becoming a $50 billion business. Lam has a 56%-57% market share in wafer etch, and about a 40% share in vapor deposition. It wants to gain another four percentage points in both through 2019."
Black also addressed Lam's cash position noting the company has $22 a share in net cash with over 70% (approximately $2.8 billion) trapped overseas. "Exclude that and the stock sells for 11.6 times earnings. It is a giveaway. The average company sells for 19 times earnings, and LAM isn't an average company."
Black describes Lam as having the "wind at its back" across multiple industries experiencing strong demand, from memory and flash to the cloud and IoT. And he thinks these growth areas provide positive earnings visibility going out two years.
Always Looking for the Semi Cycle Top
The negative market reaction in Lam shares immediately following earnings is a bit of a puzzle. Until, that is, you think about the traditional fear in this industry, which saw the Philly Semiconductor Index (SOX) retreat 4% from its all-time highs on Wednesday and Thursday as other chip and equipment makers like Applied Materials (AMAT - Free Report) , Xilinx (XLNX - Free Report) and Broadcom (AVGO - Free Report) also fell between 2% and 5% on Thursday.

Technology investors are still prone to seeing a very cyclical industry with brief periods of boom followed buy busts. But this isn't the 1990s and we aren't talking about desktop computers driving demand.

This is the age of mobile, datacenters, automotive innovations, robotics and automation, and artificial intelligence. These areas are not slowing down and should provide investors enough visibility that they might think twice and give my "technology super cycle" the benefit of the doubt.

But one of the big fears for Lam is that memory chip supply will saturate demand in 2019. Since that's about two-thirds of Lam's business, investors are probably somewhat justified in wondering if this is "as good as it gets" and the big double-digit growth rates we are accustomed to will drop hard and fast in the next year.

The Analysts Chip In

So far, that's not what the investment bank semiconductor analysts are seeing or saying. Here were some of their price target raises as they see the growth trends as "exciting and sustainable" as CEO Anstice does..

Royal Bank of Canada: from $225 to $245
KeyBanc: from $225 to $261
Deutsche Bank: from $220 to $240
JPMorgan: from $230 to $260
Morgan Stanley: from $229 to $238
Needham & Company: from $235 to $270
Stifel Nicolaus: from $235 to $260
Credit Suisse: from $245 to $275
Susquehanna: from $250 to $260
B.Riley: from $250 to $270
Nomura/Instinet: from $230 to $250

Price target hikes are nice, but what savvy investors can really sink their teeth into are rising sales and profit estimates. We'll be watching those filter into the Zacks Detailed Estimates page over the coming days and hopefully those numbers will reward those like me who are buying the dip.

Disclosure: I own LRCX shares for the Zacks TAZR Trader portfolio.

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