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.
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.