Semiconductor processing equipment manufacturer Lam Research (NASDAQ:LRCX) will report Q4 2006 financial results on Wednesday, Jan. 17.

What analysts say:

  • Buy, sell, or waffle? Of the 28 analysts covering Lam Research, 13 say hold, 13 rate it a buy, and two say it will short circuit with a sell.
  • Revenues. On average, they expect revenues to surge 73% to $620.8 million.
  • Earnings. Profits are also expected to more than double to $1.11 per share.

What management says:
Lam Research has been benefiting from strong customer demand within the semiconductor industry for its processing equipment, particularly in the area of memory and foundry products. Last quarter, the biggest growth took place in the 300-millimeter wafer area, which gives customers a larger "platter" from which to cut individual circuits. Growth was 89% in the September quarter and has been a trend all across the semiconductor industry, as wafers have grown from their previous 200-millimeter size.

The company was also able to record $725 million in new orders in its backlog -- more than double the year before and up 13% from the June quarter. With this kind of pent-up demand for products, it belies the regular tales of woe that are forecast for semiconductors, which has been predicted to have a slowdown anytime now. Since the industry is cyclical, however, there undoubtedly will come a time when supply exceeds demand and Lam will undergo one of its contractions as it has in the past. For example, 2000 was a perfect storm of conditions that saw the tech boom meltdown at the same time the semiconductor industry hit a peak and demand fell. Lam's stock went from about $50 a share down to $20.

What management does:
The greater level of demand for Lam Research's products has been driving margins up across the board, as the company has been better able to utilize its factories. The greater level of profits has allowed the company to invest more heavily in new technologies, like etch and lithographic film, while still increasing operating profits. The new technologies should help down the road to diversify its base, even though memory continues to dominate.

Margins

09/05

12/05

03/06

06/06

09/06

Gross

50.2

49.5

49.6

50.7

51.4

Op.

24.5

22.6

22.4

26.1

29.3

Net

18.5

18.3

19.1

20.4

24.4
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As Lam Research continues to grow its leadership position, it increases the installed base of equipment its customers have come to rely upon. For example, as my Foolish colleague Dan Bloom noted last year, the etch technology grew its market share from 34% in 2004 to 44% in 2006. While Lam is off its annual highs, and the possibility always looms for semiconductor equipment makers to get caught in a downdraft as customers find their inventories at high levels, its P/E continues to drop and now sits at 15. Over the past decade, its average lowest P/E was 12, which its current price would give it on a forward basis for 2007 earnings and only a 13 on 2008 results.

That's making Lam Research look pretty cheap these days, even with the potential for an industry slowdown. If the stock reaches the mid- to high-40s, I think its future performance could surprise many.

Competitors:

  • Applied Materials (NASDAQ:AMAT)
  • Mattson Technology (NASDAQ:MATT)
  • Varian Semiconductor (NASDAQ:VSEA)
  • Kulicke & Soffa (NASDAQ:KLIC)
  • Harsco (NYSE:HSC)
  • KLA-Tencor (NASDAQ:KLAC)

Related Foolishness:

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.