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Lam Research (LRCX) Up 10.9% Since Last Earnings Report: Can It Continue?

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Lear (LEA) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for Lam Research (LRCX). Shares have added about 10.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lam Research due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Lam Research Q2 Earnings & Revenues Beat Estimates

Lam Research Corporation reported second-quarter fiscal 2019 non-GAAP earnings of $3.87 per share, which beat the Zacks Consensus Estimate by 20 cents. The figure increased 15.2% sequentially but was down 10.8% year over year.

Adjusted revenues increased 8.2% sequentially but decreased 2.2% year over year to $2.52 billion, beating the Zacks Consensus Estimate of $2.5 billion.

The sequential growth is attributed to robust performance of both etch and deposition technologies, which in turn resulted in the expansion of its serviceable addressable market.

Management stated that memory segments will likely weaken during this year as customers continue to reign in both NAND and DRAM spending. However, it expects non-memory segments to grow in 2019, driven by continued rise in 3D architectures, along with technology innovation for transistor, interconnect and advanced packaging applications.

Top Line in Detail

In the quarter, Japan, Korea, Taiwan and China accounted for 27%, 25%, 17% and 14% of the company’s total revenues. Southeast Asia’s contribution was 7%, while both the United States and Europe contributed 5% each.

It experienced rising demand for DRAM application and NAND Flash, which led to increasing adoption of dielectric etch technology. Moreover, Lam Research benefited from its transition to new data-enabled economy, in which DRAM and NAND continue to gain from density growth.

Operating Details

Non-GAAP gross margin came in at 46.3%, which contracted 10 basis points (bps) on a year-over-year basis.

Non-GAAP operating expenses were $440 million, reflecting a decrease of 2.4% sequentially. As a percentage of sales, research and development expenses increased, while selling, general and administrative expenditure marked a decline.

Adjusted operating margin was 28.8%, expanding 180 bps sequentially. The increase was due to solid execution and operating leverage.

Balance Sheet & Cash Flow

At the end of the fiscal second quarter, cash and cash equivalents and short-term investments decreased to $3.6 billion from $3.9 billion in the fiscal first quarter.

Cash flow from operating activities was $642 million, down from $720.3 billion in the fiscal first quarter. Capital expenditures were $106 million, up from $56 million in the fiscal first quarter.

During the quarter, Lam Research paid dividends of $168 million.

Guidance

For third-quarter fiscal 2019, Lam Research projects revenues to be $2.4 billion (+/- $150 million). 

Gross margin is predicted at around 44.5% (+/-1%) and operating margin is expected to be 25% (+/-1%).

Non-GAAP earnings are projected at $3.40 (+/- 20 cents) per share on a share count of nearly 159 million. 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Lam Research has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lam Research has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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