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Lam Research Corp (NASD:LRCX); My Fair Value Estimate:



·Abbreviations:

o My Estimate of Fair Value (MFV)

o Return on Invested Capital (ROIC)

o Operating Earnings (OI)

o Enterprise Value (EV)

o Price-to-earnings Ratio (PE)

o Liquidation Value = Tangible Book Value (TBV)

o Book Value (BV)


Lam Research Corp is engaged in the semiconductor processing equipment industry. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.


Pros:

·The % of shares short is <5%

o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company

·The company’s debt relative to its Market Cap is <25%

·Shares trade above the 200-day simple moving average

o This shouldn’t matter, but enough people think it does that I give it a little weight…

·The company appears to have an easy year-over-year OI comparison in the coming quarter


Cons:

The company didn’t generate any negatives on the scorecard


Those pros and—more importantly—the company’s average ROIC (~20% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $4b OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly excellent balance sheet and 5-yr average multiple of PE x 18.2**, I think OI x 10 is a reasonably conservative fair value, which equates to MFV of $283.61.


At a recent price of $483.28, the differential between market value and MFV is 70%, thus I think shares are overvalued.


Conclusion: I’d like to buy shares, but not at current prices. This has been a frustrating one for me. I’ve had it on a watchlist for four years. The stock price has gone up 200% and never fallen to MFV. This is one risk of rules-based (https://www.veriteventures.com/post/what-is-investing) investing. I miss out on some winners waiting for optimal risk/reward setups.


My positioning: None


For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)


-V


*Post prepared using data as of 2/21/23

**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.

The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.

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