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ACFI810 Financial Statement Analysis and Valuation

Company performance Analysis Lam Research Corp

Executive Summary

Following an article released by Market Watch on US stock performance (2019), Lam Research Corp (LRC) was placed among the best performing stocks in US stock market. This report contains an analysis of the company performance for the financial year 2019. The results of the analysis shows that the company had a general reduction in its efficiency where the financial performance of year 2018 was better than 2019. The analysis shows that there was a generally reduction in sales revenue of -$1,423 million between 2018 and 2019 which has resulted to negative changes in the profitability and efficiency ratio analysis. However, further analysis shows that the performance of the company in year 2019 was far way better than the industrial averages of the Technology Hardware & Equipment sector that the company belongs. The ratio analysis also shows that the company performed better than some of its competitors such as CVD Equipment Corp, Amtech Systems Inc. and KLA Corp. hence being named a better performer in the stock ranking for 2018. Detailed analysis are contained in the body of the report.

Introduction.

This report contains a performance analysis of Lam Research Corp for the latest annual report released 2019 as at June 24th, (Lam Research Corp, 2020). The analysis try to explain why the company stock was ranked among the top performance in 2019. LRC operates in the Technology Hardware & Equipment sector where it designs and manufactures semiconductors used in fabrication of integrated circuits. Its headquarters are in Fremont, California in the US and the company recorded a revenue of US$ 9.65 billion in 2019 where US$ 2.19 billion was net profit. The share price movement for the past one year is as shown below,

Source: Bloomberg, 2020.

According to Bloomberg, (2020), Lam Research Corp trading as LRCX, has a market cap of US$ 43.731 billion and a total of 145.5 million share out. The current stock price is 300.46USD where in 2019, it closed at 292.40USD as at 31st December 2019, with a one year stretch of 163.60 - 344.32USD. Its latest dividend payout was $4.60 in 2019 and hand a dividend yield of 1.53% for the period. The body of the report contains financial analysis of the key components that resulted to this performance basing on performance based ratios. The report will then conclude with the key findings of the analysis.

Financial Analysis

Lam Research Corporation performance for the year 2019 is evaluated according to the following Profitability and investment ratios. This ratios have been selected because they will help in evaluating management activities and engagements for the period. It is the activities that the company engaged in that resulted to the performance of the company.

  1. Gross profitability.

Dividing the company’s net sales revenue by the gross profit, it shows the gross profit margin for the period. According to Bloomberg,

 

2019

2018

Change

Gross Profit Margin

45.20%

46.11%

-0.91%

Comparing the two periods, there has been a -0.91% change in the GPM. According to the company’s annual report (2019), this has resulted from the decrease in the sales revenue of the company, which was $11,076 million in financial year 2018 with a gross margin of $5,165 million. 2019 registered a decreased $ 9,653 million revenue and a gross profit of $4,358 million, (LRC Annual Report, 2019). Therefore, it resulted to the ratio decrease. However, comparing this with the industrial average, the sector had a gross profit margin of 37.19% (CISMarket, 2019). This shows that the company was far way above average with +8.01% showing a better performance in the financial year. Comparing this with a close competitor like CVD Equipment Corp which had 39.76% margin showing a better performance by LRC. With this trend, the company performance will be positive and will attract more investors in future.

  1. Operating Profit Margin

Dividing the operating profit for the company against the sales revenue, the ratio will show the percentage profit the company was able to make after deducting its operating expenses. The operating profit performance was as follows according to the annual report 2019,

 

2019

2018

Change

Operating Profit Margin

25.20%

28.19%

-2.99%

The -2.99% change is attributed to higher sales revenue in 2018 than 2019 by +$1,423 million. This translated to a $2,464 million in 2019 compared to 3,213 million in 2018. LRC was able to perform above the industrial average by +.1.64%, which was 23.56 % showing a better place in the market. The graph below shows that the company is currently performing at a stable operating profit margin which is key in stock performance,

Source: Bloomberg, 2020

The trend is good since it does not have high fluctuations which will lead to positive future growth.

  1. Net Profitability

To get the net profit margin, the sales revenue was divided by the net profit to show the percentage of the revenue that was the overall net profit to be enjoyed by the shareholders and finance other activities. According to Bloomberg,

 

2019

2018

Change

Net Profit Margin

21.68%

26.69%

-5.01%

The two financial years shows a bigger -5.01% change. As noted earlier, the sales revenue for the year 2018 were more than annual sales for 2019 by +$1,423 million. This then brought about the -5.01% difference in the profit margin where the company had $2,191 million net profit in 2019, $189 million fewer than the $2,380 million recorded in 2018. However, the margin was +1.41% more than the average 20.27 % industrial average for the sector. Comparing this with its competitor Amtech Systems Inc. which had -6.02% margin, it shows that LRC performance was better in the market hence outdoing the competitors in stock price levels in the market.

  1. Return on assets

To evaluate LRC efficiency in using its assets, this ratio divides the net profit by the net assets of the company. With an asset base of $12,001 million and $ 12,479 million in financial year 2019 and 2018 respectively, the ROA of the company is,

 

2019

2018

Change

ROA

16.85%

24.25%

-7.4%

With the net income for the company decreasing by -$189 million from $2,380 million recorded in 2018 to $2,191 million net profit in 2019, and a -$478 million in net assets, the resulting ROA decreased by -7.4%. According to the annual report 2019, the allowances for doubtful debts write-off greatly reduced the account receivables by almost half of the amount reported in 2018 resulting to the change in asset base. The industrial average was 17.49 % showing that the company was slightly less efficient by -0.64%. ROA graph for the company shows that it is however with its average performance over the years as shown,

Source: Bloomberg, 2020.

The negative trend is however not good for the company to ensure positive future growth an need to be more efficient in using the assets to realise higher ROA than the market average.

  1. Return on Investment.

Measuring the net income against the shareholders’ equity is also a key analysis to assess the performance of LRC. The ROI of the company according to Bloomberg is as follows,

 

2019

2018

Change

ROA

27.78%

38.44%

-10.66%

The analysis show a change of -10.66 between the two financial years. However there was a $189 million decrease in net income, an analysis of the annual report shows that there was a $1,828 million shareholder decrease from $6,501 million in 2018 to $4,673 million in 2019. This resulted from the decrease in the treasury stock held at the company, (LRC investor relation, 2019). The industrial average for the same ratio was 39.85% showing poor performance by the company. Comparing with a key competitor KLA Corp. the company had an ROI of 23.23%. This was way below LRC by -4.55% showing that the company performance was favorable. However, the trend graph below shows that the company is not at its best,

Source: Bloomberg, 2020.

If the trend continues, the company will not attract more investors because of the decreasing trend in return on investment.

Conclusion

According to the Analysis, LRC performance was not at the best in the 2019 financial year. Comparing the year with the financial year 2018, there has been a significant drop in the performance of the company. The Gross, Operating and Net profit margins have dropped by 0.91%, -2.99% and -5.01% respectively. All these resulting from decrease in Sales revenue for the year which has lastly led to decrease in ROI for the company by 10.66%. However, the company has constantly raged above the industrial average in most case and also above some of its competitors. This has led to an overall better performance in the industry despite the negative changes in company output for the two years.

References

Bloomberg, 2020. Lam Research Corp share performance, available online at, https://www.bloomberg.com/quote/LRCX:US [accessed February 25, 2020].

CISMarket, 2019. US Technology Hardware & Equipment sector financial performance, available online at https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1002 [accessed February 25, 2020]

CNBC, 2020. Stock market performance and latest news update, available online at https://www.cnbc.com/quotes/?symbol=LRCX [accessed February 25, 2020]

Easton, M., and Zhang Sommers. Financial Statement Analysis & Valuation, 5e. 2018.

Isidro, H. and Sobral, M., 2015. The effects of women on corporate boards on firm value, financial performance, and ethical and social compliance. Journal of Business Ethics, 132(1), pp.1-19.

Konchitchki, Y. and Patatoukas, P.N., 2014. Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), pp.669-694.

Lam Research Corporation, 2020. Annual report 2019, available online at, https://investor.lamresearch.com/static-files/e9d00d1f-a14a-4060-8d04-b91d693c0744 [accessed February 25, 2020]

Lam Research Corporation, 2020. Investor Relations: Available online at https://www.lamresearch.com/investors-overview/ [accessed February 25, 2020].

Market Watch, 2019. Most soared and sunk stocks in 2019, available online at https://www.marketwatch.com/story/here-are-the-stocks-that-have-soared-and-sank-the-most-in-2019-2019-10-01 [accessed February 24, 2020]

Nimtrakoon, S., 2015. The relationship between intellectual capital, firms’ market value and financial performance. Journal of Intellectual Capital.

Wahlen, J.M., Baginski, S.P. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

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