When Jeremy Grantham speaks, I listen. He's not afraid to have a contrarian mind-set lead him in a different direction from the crowd. Recently, Grantham believed some high-quality companies traded at attractive prices. He wasn't sure why the high-quality names were on sale, but he thought they offered the best returns for the next seven years. He has a pretty good long-term track record of sniffing out where the best returns are, so let's see what companies Grantham is rooting out.
What do "high-quality" and "on sale" mean? Certainly they will represent different things to different people. For our purposes, let's say high-quality companies have a strong balance sheet and generate excellent returns on invested capital. We'll use free cash flow yield (free cash flow / market cap) compared to the 10-year Treasury yield as a proxy for value.
So a Grantham-like opportunity would have:
1. Net cash position > 0
More cash than debt can indicate a strong balance sheet.
2. ROIC > 15%
Earning a 15% return should be more than a company's cost of capital.
3. FCF / P > 4%
10-year Treasuries are yielding about 3%. We want more return than that.
With the definitions out of the way, let's see if Lam Research
As you can see from the table below, Lam Research has a positive net cash position on its balance sheet. What's more, the company currently earns a return on invested capital that is higher than its cost of capital. Fools love companies that take shareholder capital and create value with it.
|
Company |
Net Cash |
ROIC |
FCF/P |
|---|---|---|---|
|
Lam Research Corp. |
$808.8 |
28.6% |
5.9% |
|
KLA-Tencor Corp. |
$788.3 |
12.8% |
7.5% |
|
Kulicke & Soffa Industries Inc. |
$66.0 |
N/A |
2.7% |
Source: Capital IQ (a division of Standard & Poor's) and author calculations.
Dollars in millions.
How does it stack up to the competition? Competitors KLA-Tencor and Kulicke & Soffa don't quite make the grade on this test. Both KLA-Tencor and Kulicke & Soffa have more cash than debt on their balance sheets, which is a good thing. Where they both miss is on the ROIC side, with KLA-Tencor's too low and Kulicke & Soffa recently turning in a loss.
Foolish conclusion
Would Jeremy Grantham buy Lam Research? That's really hard to say. After all, he's his own investor. But with quality numbers like the ones above, I have to believe Grantham would certainly give Lam Research a good, hard look. And you and I should, too.
