"The sun'll come out tomorrow ...." -- Broadway musical Annie.
Add Lam Research (NASDAQ:LRCX), the third-largest American semiconductor equipment company, to the list of those expecting 2006 to be a better year than 2005. It's not hard to see why they might hope that, given how bad this year has been for them relative to last year.
Results for the September quarter don't hold up especially well on an annual comparison. Sales were down 23% on lower shipments, and earnings, in turn, were down about 45%. While new orders perked up slightly from the prior quarter, they were down about 24% from the year-ago level.
It's not all bad news, though. Despite being in a cyclical rough patch, the company still generated positive free cash -- even more than in the year-ago period, despite the lower earnings. In my view, to continue generating cash flow (and buying back stock, as well) when times are relatively tough is a sign of two things: Management has figured out how to manage through good and bad times. And when things do turn around, the company should have considerable cash-flow leverage.
I do believe that an industry turnaround is a "when," not an "if," event. After all, none of us is especially willing to live without our gadgets, and those gadgets demand increasingly sophisticated chips. While chip makers and contract manufacturers can delay new equipment purchases, they'll eventually have to give in and buy new gear to stay competitive.
Since Lam gets close to half of its business from memory chip companies (and another big chunk from contract manufacturers), I suppose it's fair to suggest that Lam's fortunes are tied to those of the consumer electronics space, including portable gadgets, cell phones, and computers. That may be true, but it might also be irrelevant. For better or for worse, I would expect Lam to trade somewhat in tandem with peers like KLA-Tencor (NASDAQ:KLAC), Novellus (NASDAQ:NVLS), and Applied Materials (NASDAQ:AMAT) over the long haul. Then again, almost anything is possible in the short run, and Lam has handily outperformed all of those other stocks in the past year.
Lam is also a bit of an oddball when it comes to valuation. Despite solidly competitive financial metrics (due in part to outsourcing to companies like Solectron (NYSE:SLR)), it trades at a discount to its peers. As I said before, I do believe that this space will recover. But investors buying now need to be prepared just in case that recovery takes a little longer than even the industry players suspect.
For more on the equipment space:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
