Lam Research Corporation (LRCX):   Long Presented by Ryan Rechkemmer 13  November 2011
Agenda
<ul><li>Revenue Growth: 51.74% </li></ul><ul><li>Operating Margin: 22.43% </li></ul><ul><li>Return on Equity: 28.15% </li>...
What Lam Research Does Pictured:  plasma-based Coronus Bevel Cleaning System, which removes edge defects from 200 mm and 3...
Lam Research Heads the Electronics Supply Chain LRCX  Customer Intermediate Product End Product
Thesis #1: High Growth  in Niche Market <ul><li>Lam Research has a highly specialized and profitable niche position </li><...
Thesis #1: High Growth  in Niche Market •  1,200,000 PB = the data created and replicated in 2010 •  11,000 PB = the outpu...
Thesis #2: Sustainable  Competitive Advantages Source: SanDisk Financial Analyst Day presentation, February 24, 2011, slid...
Thesis #2: Sustainable  Competitive Advantages <ul><li>Lam Research possesses pricing power due to its entrenched market p...
Misperception #1:  Adverse Cyclical Timing <ul><li>New demand for semiconductor fabrication capacity is a secular growth t...
Misperception #2:  Tough Competition <ul><li>Applied Materials and Tokyo Electron, the world’s largest semiconductor equip...
Catalyst #1: Leadership in  Adjacent Segments <ul><li>Acquired SEZ Group in 2008, expanding complementary product portfoli...
Catalyst #2:  End-User Demand <ul><li>The iPhone consumes 30% of the world’s supply of NAND  flash memory, which is used t...
Value Added Research: Prof. Sudhanva Gurumurthi Pictured:  Associate Professor of Computer Science, UVA, Sudhanva Gurumurt...
Triangulated Value: 59.5% Upside Forward DCF Model (50% weighting) Historical  Valuation  Analysis (30% weighting) Peer Gr...
<ul><li>An innovator  on the frontier of high-tech </li></ul><ul><li>Buy LRCX, target price:  $69.75 </li></ul>Summary and...
<ul><li>Thank You </li></ul>Questions?
Finding a Winner: CGO / EAVP Stock Screener <ul><li>Criteria Used </li></ul><ul><li>10 Day Average Volume Versus 90 Day Av...
Monte Carlo Simulation Revenue Build Note: this is just one representative sample prediction from a range of simulation ou...
Forward Discounted Cash Flow Model 5 Year Price Target :  $ 72.63 Note: Revenue build projections are average of simulatio...
Peer Group Comparables Analysis
Historical Valuation Analysis 43.73 55.22 105.67 26% 142%
Product Portfolio and Technology LRCX’s etch products perform production-proven in situ etch of complex gate, shallow tren...
Semiconductor Fabrication, Part 1
Semiconductor Fabrication, Part 2
Income Statement (in 1000’s)
Balance Sheet (in 1000’s)
Balance Sheet (in 1000’s)
Cash Flow (in 1000’s)
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MII - Fall 2011 Stock Pitch Competition - Lam Research (LRCX) Presentation - Ryan Rechkemmer

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PowerPoint presentation accompanying my long pitch of Lam Research Corp. (NASDAQ: LRCX) for the Fall 2011 McIntire Investment Institute Underclassmen Stock Pitch Competition

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  • Lam Research has a highly specialized and profitable niche position in a high growth technology segment. Future sales growth for LRCX will be attained by the need for semiconductor manufacturers to expand and upgrade production capabilities in order to keep pace with rapid technological change, competitors, and customer demand, especially as memory capacities in new electronic devices will have to continually improve to match increasingly sophisticated and data-rich content and applications, driven by accelerated consumer adoption rates for new products such as tablet devices and high-end smart phones. Furthermore, accelerated demand for servers, networking equipment, and cloud computing necessitate higher production capacity for memory chips.
  • Lam Research possesses pricing power and a sustainable competitive advantage due to its entrenched market position. As a result of continuous research and development, Lam Research has been gaining market share and now claims 54% of the total revenue in the etch technology segment, more than any other firm in the history of its industry. Despite a relatively unpredictable production backlog, LRCX benefits from the loyalty of its customers since LRCX structures its systems so that the introduction of new etch and clean products is accompanied by the availability of these same capabilities as upgrades to its installed base, a benefit that can provide customers with a cost-effective strategy for extending the performance and functionality of their existing wafer fabrication lines while simultaneously expanding their capacity. Consequently, LRCX is able to retain customers due to inherently high incremental switching costs.
  • Market participants are fearful that heightened uncertainty about the strength of the macroeconomic environment will result in semiconductor manufacturers delaying investments in capital equipment for their production lines. However, Lam Research is better prepared than ever on account of an improved operating model that implements outsourcing, which offers a variable-cost structure to adjust to industry fluctuations and has already yielded improved profitability. Applied Materials and Tokyo Electron, the world’s largest semiconductor equipment firms, have vastly more resources and operate on a larger scale than Lam Research, yet LRCX has an established history of profitability from specializing in etch technology, affording LRCX a solid foundation and nimble stance from which to expand into adjacent markets. LRCX operates in a highly pro-cyclical industry, characterized by volatile shifts in capital spending by semiconductor manufacturers; therefore, persistent innovative leadership and technological advancement throughout each business refresh cycle is paramount to fending off LRCX’s competitors and sustaining profitability and growth. Specifically, Applied Materials could use its recent acquisition of Varian Semiconductor Equipment to create a more complete and compatible suite of semiconductor manufacturing equipment that presents a customer value proposition rivaling LRCX. Lam Research could fail to add incremental shareholder value through future acquisitions or other potential uses of the company’s sizeable cash balances, which is maintained to provide a countercyclical bulwark and continue R&amp;D funding. LRCX is highly reliant on a few customers for a large portion of its revenue, and quarterly revenues are dependent upon the acceptance of a relatively limited number of systems, which are priced up to approximately $6 M per unit. A larger customer switching to a competitor would be detrimental. Furthermore, customers must routinely demand improved production capabilities for their manufacturing in order for LRCX to gain recurring revenues on a regular basis.
  • Market participants are fearful that heightened uncertainty about the strength of the macroeconomic environment will result in semiconductor manufacturers delaying investments in capital equipment for their production lines. However, Lam Research is better prepared than ever on account of an improved operating model that implements outsourcing, which offers a variable-cost structure to adjust to industry fluctuations and has already yielded improved profitability. Applied Materials and Tokyo Electron, the world’s largest semiconductor equipment firms, have vastly more resources and operate on a larger scale than Lam Research, yet LRCX has an established history of profitability from specializing in etch technology, affording LRCX a solid foundation and nimble stance from which to expand into adjacent markets. LRCX operates in a highly pro-cyclical industry, characterized by volatile shifts in capital spending by semiconductor manufacturers; therefore, persistent innovative leadership and technological advancement throughout each business refresh cycle is paramount to fending off LRCX’s competitors and sustaining profitability and growth. Specifically, Applied Materials could use its recent acquisition of Varian Semiconductor Equipment to create a more complete and compatible suite of semiconductor manufacturing equipment that presents a customer value proposition rivaling LRCX. Lam Research could fail to add incremental shareholder value through future acquisitions or other potential uses of the company’s sizeable cash balances, which is maintained to provide a countercyclical bulwark and continue R&amp;D funding. LRCX is highly reliant on a few customers for a large portion of its revenue, and quarterly revenues are dependent upon the acceptance of a relatively limited number of systems, which are priced up to approximately $6 M per unit. A larger customer switching to a competitor would be detrimental. Furthermore, customers must routinely demand improved production capabilities for their manufacturing in order for LRCX to gain recurring revenues on a regular basis.
  • Smart management and a first-mover advantage have established Lam Research’s leadership in adjacent markets. A key driver of sales growth is the potential $1 billion market for single-wafer clean systems, which LRCX smartly entered and now leads just as its customers have begun to migrate to single-wafer from batch processes. Successfully capturing the potential of adjacent markets and leading technological change through dedicated investment in R&amp;D are LRCX hallmarks that solidify its advantages over larger and less focused firms like Applied Materials and Tokyo Electron. New technologies and materials such as 300-millimeter wafers and low-k dielectrics are continuously needed because they help chipmakers to produce cheaper, faster, and smaller chips. Volumes will inherently swell amid rising end user demand for devices like smartphones and tablets that require increasingly more advanced technological components, allowing LRCX to maintain lucrative profit margins by competing on the performance rather than price of its products. The company is actively seeking to increase the size of its addressable market by strategically entering adjacent markets that complement and enhance LRCX’s core strengths in plasma etch. With the 2006 acquisition of Silfex Incorporated, formerly Bullen Semiconductor, LRCX is expanding its customer base by supplying high-purity custom silicon components and assemblies to a broad base of high-technology markets, including semiconductor test, solar, and optical industries, in addition to securing silicon growing and fabrication capabilities that help ensure continued availability of proprietary components essential to the performance of LRCX’s market-leading etch chambers. Similarly, having bought Switzerland-based SEZ Group in 2008, Lam Research acquired a broad equipment portfolio featuring advanced spin-process single wafer clean technology that will allow LRCX to offer a full spectrum of wafer cleaning and decontamination solutions, which are key processes adjacent to etch where LRCX leads the market, and gained access to an installed base of more than 1,200 wet wafer processing systems that provides Lam Research with an in-place infrastructure that will accelerate the Company’s development of advanced single-wafer clean solutions, including both wet and plasma-based technologies.  As a result, Lam Research is well positioned to take advantage of the transition from batch to single-wafer processing to meet the stringent wafer cleaning requirements of next-generation devices. Always the innovator, Lam Research going forward can still be anticipated to ride prevailing trends and adapt constantly to changing customer needs. The movement towards faster and smaller transistors will likely be met positively by LRCX as they pursue new etch technologies. Thus while broader conditions for the semiconductor industry may be adverse in the short run, LRCX is preparing to transform its product offerings to service new markets. In any case, there is certainly reason for optimism at Lam Research when industry trends continue to favor further investment in capital equipment.
  • Byte of the Apple Apple&apos;s iPhone Causes Worldwide Memory Chip Shortage Posted by: Arik Hesseldahl on February 17, 2010 Among the list of things for which Apple’s ever popular iPhone is responsible, you can now add “causing a worldwide shortage of memory chips.” That’s the word from market research firm iSuppli today in a report saying that supplies of so-called NAND-type flash memory, which is used to store music, video and apps on the iPhone, will reach a point of critical shortage during 2010, as Apple is expected to boost the iPhone’s capacity to 64 gigabytes, prompting rivals like Nokia, Google, and HTC to boost the memory on their own phones to keep up. As it happens, as iSuppli analyst Michael Yang tells me, the iPhone consumes more NAND flash memory than any other product, about 30% of the world’s supply
  • “ traditional memory storage technology is not yet cost effective.” “ The demand for memory is always growing.” “ Cloud computing is doing that. It’s going to continue. You need to keep adding extra capacity.” Concerning the feasibility and adoption of NAND flash memory: “ Was scaling faster than Moore’s Law” “ It won’t be around much longer in its current form.” “ Lots of research activity there” On the sustained trend towards miniaturization of the integrated circuitry in microchips as suggested by Moore’s Law and Dennard’s Scaling Theory possibly being threatened by physical constraints as transistor sizes approach a terminal node: “ DRAM has a lot of technology limits. CMOS (Complementary Metal–Oxide–Semiconductor) has its limits.” “ It can be sustained with a different technology. You switch over to a new technology… with different kinds of materials and transistor structures – that’s the fundamental thing.” Discussing new technologies: [With 3-D Integrated Circuits] “you add circuits vertically. You can pack in a lot more computing memory [with] different kinds of manufacturing technologies. A lot of research activity in that area in the last 3-5 years. Intel has a prototype, but a full-fledged 3-D chip does not yet exist. [It] does get a lot of attention. Future exponential growth in the adoption of cloud computing, which relies upon, connects devices that use, and employs communications equipment that contain memory systems, indicates the need for memory foundries to continuously expand capacity. Current technologies have fundamental limits that constrain their capability to meet the needs of new end-user applications. More advanced etch technologies will be required to complement future shifts in the structural form of memory device technologies. In particular, a company like Lam Research that has invested heavily in 3-D IC etch technology is well positioned to capture a large share of a new market formed by the expected future adoption by semiconductor manufacturers of 3-D IC etch capabilities.
  • Technological Facilitator &amp; Beneficiary LRCX products enable the production of vital components at the core of popular new devices and applications. Lam Research profits from the increasing role that these technologies play in powering society.
  • Capital Gains Overhang and the Earnings Announcement Volume Premium  Financial Analysts Journal March/April 2010, Vol. 66, No. 2, 13 pages Source: CFA Institute Wonseok Choi | Kenton Hoyem | Jung-Wook Kim Abstract This study examined why stocks that experience high abnormal trading volume around earnings announcements earn high returns. The high returns of high-volume stocks appear to be associated with selling pressure that is independent of fundamentals and that comes from a subset of investors who base their selling decisions on the magnitude of unrealized capital gains or losses. Supplementary evidence based on account-level data from a U.S. brokerage firm suggests extra selling pressure for stocks with large capital losses around earnings announcements. These patterns also suggest that the conventional interpretation of the disposition effect may not hold for stocks with large, unrealized capital losses around earnings announcements.
  • Discounted Cash Flow Analysis with Revenue Build Constructed From Extrapolation of Sinusoidal Regression for 1994-2011 LRCX Quarterly Sales Data Using a Random Number Generator to Create Periodic Market Shocks Fitted to a Cauchy-Lorentz Distribution Historical Valuation Analysis Peer Group Comparables Analysis Triangulation
  • Discounted Cash Flow Analysis with Revenue Build Constructed From Extrapolation of Sinusoidal Regression for 1994-2011 LRCX Quarterly Sales Data Using a Random Number Generator to Create Periodic Market Shocks Fitted to a Cauchy-Lorentz Distribution Historical Valuation Analysis Peer Group Comparables Analysis Triangulation
  • Transcript of "MII - Fall 2011 Stock Pitch Competition - Lam Research (LRCX) Presentation - Ryan Rechkemmer"

    1. 1. Lam Research Corporation (LRCX): Long Presented by Ryan Rechkemmer 13 November 2011
    2. 2. Agenda
    3. 3. <ul><li>Revenue Growth: 51.74% </li></ul><ul><li>Operating Margin: 22.43% </li></ul><ul><li>Return on Equity: 28.15% </li></ul><ul><li>Debt/Equity: 0.31 </li></ul>Key Financials <ul><li>Market Cap: 5.40 B </li></ul><ul><li>Price/Earnings: 9.09 </li></ul><ul><li>EV/EBITDA: 5.25 </li></ul><ul><li>Price/Book: 1.43 </li></ul>
    4. 4. What Lam Research Does Pictured: plasma-based Coronus Bevel Cleaning System, which removes edge defects from 200 mm and 300 mm silicon wafers <ul><li>Supplier and servicer of high-performance wafer fabrication equipment for the semiconductor industry </li></ul><ul><li>Specializing in: </li></ul><ul><ul><li>etch – carves patterns in wafer surface </li></ul></ul><ul><ul><li>clean – eliminates imperfections on wafer </li></ul></ul>
    5. 5. Lam Research Heads the Electronics Supply Chain LRCX Customer Intermediate Product End Product
    6. 6. Thesis #1: High Growth in Niche Market <ul><li>Lam Research has a highly specialized and profitable niche position </li></ul><ul><li>Leading and expanding its market share in a fast growth technology segment </li></ul><ul><li>Increasing installed base of etch systems indicative of its competitive strengths </li></ul>
    7. 7. Thesis #1: High Growth in Niche Market • 1,200,000 PB = the data created and replicated in 2010 • 11,000 PB = the output of the entire NAND flash industry in 2010 <ul><li>Exponential growth in production of new platforms like tablets and smartphones </li></ul><ul><li>Memory device makers will need to increase output capacity several fold to meet demand </li></ul>Source: IDC - IVIEW, Sponsored by EMC, - “The Digital Universe Decade - Are Your Ready?”, May 2010 Source: Gartner November 2010 Semiconductor Forecast Worldwide – Forecast Database [SEQS-WW-DB-DATA]
    8. 8. Thesis #2: Sustainable Competitive Advantages Source: SanDisk Financial Analyst Day presentation, February 24, 2011, slide 167 <ul><li>Semiconductor manufacturers must constantly upgrade their semiconductor fabrication equipment in order to stay competitive </li></ul><ul><li>Built-in technological obsolescence makes chip foundries repeat customers for LRCX products and services </li></ul>
    9. 9. Thesis #2: Sustainable Competitive Advantages <ul><li>Lam Research possesses pricing power due to its entrenched market position </li></ul><ul><li>The history and depth of R&D conducted by LRCX creates formidable barriers to entry </li></ul><ul><li>LRCX is able to retain customers due to inherently high incremental switching costs </li></ul><ul><li>By offering technological upgrades to its installed base, Lam Research offers an attractive customer value proposition </li></ul>
    10. 10. Misperception #1: Adverse Cyclical Timing <ul><li>New demand for semiconductor fabrication capacity is a secular growth trend </li></ul>Source: Graph prepared based on data from Forward Insights, February 2011
    11. 11. Misperception #2: Tough Competition <ul><li>Applied Materials and Tokyo Electron, the world’s largest semiconductor equipment firms, have vastly more resources and operate on a larger scale than Lam Research </li></ul><ul><li>However, LRCX has an established history of profitability from specializing in etch technology, affording LRCX a solid foundation and nimble stance from which to expand into adjacent markets </li></ul>
    12. 12. Catalyst #1: Leadership in Adjacent Segments <ul><li>Acquired SEZ Group in 2008, expanding complementary product portfolio </li></ul><ul><li>Gained advanced spin-process single wafer clean technology, adjacent to etch </li></ul><ul><li>New installed base is a launching platform to accelerate future sales growth </li></ul>
    13. 13. Catalyst #2: End-User Demand <ul><li>The iPhone consumes 30% of the world’s supply of NAND flash memory, which is used to store music, videos, and apps </li></ul><ul><li>Tablets such as the iPad present a growing source of demand for memory chips, which tend to double in capacity annually </li></ul><ul><li>Rivals like Nokia, Google, and HTC must boost memory capacity in their own devices in order to keep pace with Apple </li></ul>
    14. 14. Value Added Research: Prof. Sudhanva Gurumurthi Pictured: Associate Professor of Computer Science, UVA, Sudhanva Gurumurthi, whose research, supported by grants from Intel, HP, and Google, relates to memory systems. <ul><li>The demand for memory is always growing, but current technologies like DRAM and CMOS have fundamental limits that constrain their ability to meet the needs of new end-user applications </li></ul><ul><li>More advanced technologies, like 3-dimensional integrated circuits, will have the etch process become the critical step that both defines the pattern on the wafer and reproduces it </li></ul>
    15. 15. Triangulated Value: 59.5% Upside Forward DCF Model (50% weighting) Historical Valuation Analysis (30% weighting) Peer Group Comparables Analysis (20% weighting) 72.63 46.50 80.45 69.75
    16. 16. <ul><li>An innovator on the frontier of high-tech </li></ul><ul><li>Buy LRCX, target price: $69.75 </li></ul>Summary and Recommendation
    17. 17. <ul><li>Thank You </li></ul>Questions?
    18. 18. Finding a Winner: CGO / EAVP Stock Screener <ul><li>Criteria Used </li></ul><ul><li>10 Day Average Volume Versus 90 Day Average Volume: > 25% </li></ul><ul><li>Price Performance vs. Industry over 4 Weeks: > -20% </li></ul><ul><li>Price Performance vs. S&P 500 over 4 Weeks: > 0% </li></ul><ul><li>Component of Exchange: NYSE or AMEX </li></ul><ul><li>PE Below Industry Average: .001 - 25 </li></ul><ul><li>Price Change over 4 Weeks: > 15% </li></ul><ul><li>Near 52 Week High: Within 10% </li></ul><ul><li>Price/Sales Ratio: 0.0x - 10.0x </li></ul><ul><li>Market Cap: > $1 Million </li></ul><ul><li>Price Range: > $4/Share </li></ul><ul><li>Profit Margin: > 0% </li></ul><ul><li>A stock screener adopted from: Choi, Hoyem, and Kim “Capital Gains Overhang and the Earnings Announcement Volume Premium” Financial Analysts Journal . March/April 2010, Vol. 66, No. 2, 13 pages </li></ul><ul><li>Conclusion: excess returns earned from stocks that experience high abnormal trading volume around earnings announcements and that are under selling pressure that is independent of fundamentals and that comes from a subset of investors who base their selling decisions on the magnitude of unrealized capital gains </li></ul>
    19. 19. Monte Carlo Simulation Revenue Build Note: this is just one representative sample prediction from a range of simulation outcomes
    20. 20. Forward Discounted Cash Flow Model 5 Year Price Target : $ 72.63 Note: Revenue build projections are average of simulation outcomes for each respective year
    21. 21. Peer Group Comparables Analysis
    22. 22. Historical Valuation Analysis 43.73 55.22 105.67 26% 142%
    23. 23. Product Portfolio and Technology LRCX’s etch products perform production-proven in situ etch of complex gate, shallow trench isolation, strained silicon, and double patterning film stacks using dynamic tuning and control of wafer temperature, gas distribution, and plasma uniformity. Proprietary pre-coat and post-etch chamber clean techniques ensure that every wafer sees the same environment for superior repeatability, as well as high uptime and yield. `
    24. 24. Semiconductor Fabrication, Part 1
    25. 25. Semiconductor Fabrication, Part 2
    26. 26. Income Statement (in 1000’s)
    27. 27. Balance Sheet (in 1000’s)
    28. 28. Balance Sheet (in 1000’s)
    29. 29. Cash Flow (in 1000’s)

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