Why Greenlight Capital adds to its position in Lam Research

Smita Nair

Overview: Greenlight Capital's 2Q positions (Part 7 of 7)

(Continued from Part 6)

Greenlight Capital and Lam Research

David Einhorn’s Greenlight Capital initiated new positions in Civeo Corp. (CVEO), AerCap Holdings NV (AER), Time Inc. (or TIME), and Chemtura Corp. (CHMT) It added to its positions in SunEdison Inc. (SUNE) and Lam Research (LRCX).

Greenlight Capital added to its position in Lam Research (LRCX). Currently, it accounts for 2.49% of the fund’s 2Q14 portfolio. The position was increased from 1.01% in 1Q14.

Lam Research is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. It designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits.

It offers a broad portfolio of complementary products that are used in several areas of the semiconductor manufacturing process flow. The areas include plasma etch, thin film deposition, photoresist stripping, and wafer cleaning. Its customers include semiconductor manufacturers that make memory, microprocessors, and other logic integrated circuits for a wide range of consumer and industrial electronics.

Lam Research is the market leader in plasma etch—a highly critical process step that selectively removes materials from the wafer to create a device’s features and patterns. In fiscal year 2013, Samsung Electronics Company, SK Hynix, and Taiwan Semiconductor Manufacturing Company collectively represented ~46% of Lam Research’s total revenues.

Greenlight expects rising demand for Lam’s products

Greenlight’s second quarter investor letter highlighted the position. It expects demand for Lam’s etchers and deposition tools to increase with the market requirement for continuously shrinking chip dimensions.

Lam Research noted on its website that the market demand is driving the development of and migration to new fabrication strategies that enable these advanced devices to be produced with fine, closely packed features.

The company has solutions for transistor, interconnect, patterning, advanced memory, and advanced packaging applications to deliver a wide range of wafer processing capabilities needed to create the latest chips.

It recently announced the addition of atomic layer etch (or ALE) to its portfolio of atomic layer deposition (or ALD) products. Greenlight Capital said it started the position in 1Q14 at an average price of $54.07 per share. Currently, the stock trades at $69.65.

Lam Research’s second quarter results beat estimates with revenue of $1.249 billion—up 2% from the prior quarter. Net income was $233.4 million—or $1.35 per diluted share on a generally accepted accounting principles (or GAAP) basis. Gross margin was $557 million—or 44.6% of revenue. For the upcoming quarter, Lam said it expects non-GAAP revenue of $1.15 billion plus or minus $50 million. It expects the gross margin to come in at 45.5% plus or minus one percentage point.

Management said on the earnings call that it expects ~25% of total wafer fab equipment (or WFE) investments this year will be directly associated with the inflection technologies. They added, “Based on the importance of these enabling transitions to its customers, and the current pace of pilots and production ramps, Lam maintains its view of WFE spending within a $32 billion range.”

Management also said that the memory segment represented 59% of total system shipments—down from 66% in the March quarter. Within the segment, NAND shipments contributed to ~20% while DRAM shipments contributed to 39% of total system shipments. They added that, “With healthy pricing in the DRAM market and supply remaining tight relative to demand, we have seen an increase in spending to support both 25 nanometer and 20 nanometer node conversions.” Foundry shipments comprised 30% of total system shipments. The investment in foundry is expected to strengthen in the second half of the year.

Declares dividend and authorizes share buyback

In April, Lam Research’s board approved a $1 billion capital return program with the initiation of the company’s first ever quarterly dividend of $0.18 per share and an $850 million share repurchase authorization.

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