Why Is Lam Research Jim Cramer’s Favorite Tech Stock?

Recently, we looked at the largest technology stock positions owned by Jim Cramer’s charitable trust (read our quick take on Jim Cramer’s tech stock picks). The largest position by market value was the fairly obscure Lam Research Corporation (NASDAQ:LRCX), which is a semiconductor equipment company- it designs and manufactures precision machines which are then used to produce semiconductors. Lam is down 3% year to date.

Jim Cramer

Lam Research Corporation released its results for its first fiscal quarter (which ended in September) earlier this month. Revenue was up 33% from the third quarter of 2011, and up 22% on a q/q basis. However, the gains in gross margin- while still a double-digit growth rate- were considerably lower. Lam also increased its R&D spending by 59% from a year ago and 31% over the second quarter; while this may help the company in the long run it caused Lam to report lower earnings numbers for Q3 than for Q2. It also combined with a near doubling in SGA expenses and a large increase in share count to bring earnings per share down from 58 cents in the third quarter of 2011 to 2 cents in the same period this year. There’s nothing wrong with a growth company spending more on R&D, but we don’t like that the earnings + R&D figure has come down in the last year despite considerable revenue growth. Wall Street analysts expect $2.23 in earnings per share for the current fiscal year ending in June 2013, which implies a current-year P/E multiple of 16 but is obviously highly dependent on better results in the next three quarters of the year given how close to zero profits the company was last quarter.

Ricky Sandler’s Eminence Capital initiated a position of 2.8 million shares in Lam Research Corporation during the second quarter of the year; this was Eminence’s largest new holding, and one of the ten largest positions in its 13F portfolio (find more of Eminence Capital’s favorite stocks). Sandler had previously been a partner of Wayne Cooperman’s at Fusion Partners. Cooperman’s father, billionaire Leon Cooperman, also liked Lam Research during the second quarter: his Omega Advisors increased its own stake to 1.2 million shares (see more stock picks from Omega Advisors).

Lam Research’s closest peer is Applied Materials, Inc. (NASDAQ:AMAT), which provides semiconductor manufacturing equipment and also has segments focused on products such as services and display components. At a $13 billion market cap, the company is a little over twice the size of Lam Research. It trades at only 13 times trailing earnings, but its most recent quarter was a bad one: revenue was down 16% from a year ago, with net income dropping 54%. Its forward P/E is 14 as analysts expect slightly worse numbers this year.

Other semiconductor equipment and materials companies include KLA-Tencor Corporation (NASDAQ:KLAC), Advanced Semiconductor Engineering (NYSE:ASX), and United Microelectronics Corp (NYSE:UMC). On a forward basis, these peers trade at substantial discounts to the companies we’ve discussed: their forward P/Es range from 9 to 11. Advanced Semiconductor Engineering and United Microelectronics both had lower revenue and earnings in their most recent quarter compared to the same period a year earlier, but the sell-side expects very strong growth over the next several years as their five-year PEG ratios are both 0.7. KLA-Tencor’s business, meanwhile, trades at 10 times trailing earnings in addition to its forward P/E of 9; its earnings were about flat in the company’s fourth fiscal quarter (ending in June) versus a year earlier, and it doesn’t need to do much better to justify the current stock price.

We actually don’t feel comfortable depending on either Lam Research or Applied Materials to hit its earnings target over the next few quarters: Lam has to grow its bottom line by a lot, while Applied Materials has to halt its decline. We aren’t particularly interested in the other peers as well, though they do seem to have more room for error as their pricing- especially at KLA-Tencor- is particularly low.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!