Lam Research (NASDAQ:LRCX) announced results for its fiscal fourth quarter and full year yesterday after the market close. The maker of semiconductor processing equipment saw its "etch" products continue to be in high demand, but is a downturn ahead?
For the quarter revenue rose 20% sequentially to $526 million, and $122 million, or $0.84 per share, dropped to the bottom line. Net income rose 42% from the previous quarter, and gross margins also increased a couple of points to 52.2%. During the conference call, management did state that the strength in gross margins was due to a shift in sales to higher margin products and that it was not expected to continue.
For the full year, revenue reached $1.64 billion, which was 9.3% higher than the $1.50 billion in fiscal 2005. Net income was $336 million ($2.34 per diluted share) compared with $299 million a year ago.
Meanwhile, orders grew a strong 23% from the previous quarter, reaching $640 million. Particular strength in orders came from foundry customers -- foundry orders rose 70% from the previous quarter. Orders from memory customers were flat but are expected to rise steeply in the September quarter to roughly two-thirds of all orders.
With a trailing 12-month P/E ratio of 17 the valuation looks reasonable, but here's the rub. Semiconductor capital spending is extremely volatile, so if Lam's customers (in particular the NAND flash customers) have overbuilt, Lam's revenues, and share price, could decline sharply. There is reason to be concerned about the rate of NAND flash capacity expansion this year, and a recent fab venture between SanDisk (NASDAQ:SNDK) and Toshiba shows that expansion plans continue to be aggressive. Nevertheless, if the consumer weakens or Apple's (NASDAQ:AAPL) upcoming new flash-based iPods don't fly off the shelves, NAND flash manufacturers will likely delay additional expansion.
Despite the questions surrounding the memory markets, it may be worth keeping an eye on Lam. Its etch products have gone from about 34% market share in 2004 to around 44% market share now. Furthermore, the company is developing new products for photoresist strip applications -- a type of film used during lithography to facilitate writing the fine patterns needed to produce a working chip. After the lithography process the photoresist has to be removed (or stripped) since it is not a permanent part of a semiconductor chip. Management expects its photoresist strip products will allow it to compete for a larger percentage of semiconductor manufacturers' capital spending budgets.
While Lam may be worth a look, be sure to perform your own due diligence and accept the fact that you may have to put up with significant volatility, as today's 11% plunge demonstrates.
Check out these related stories:
- NAND Flash Hits Bottom, Maybe
- Toshiba, SanDisk bless new fab venture
- Lam Research Chart
- Will Intel Pass the Test?
- Interstil Still on the Attack
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Fool contributor Dan Bloom has no financial interest in any stock mentioned in this article.
