Declining Stock and Solid Fundamentals: Is The Market Wrong About Lam Research Corporation (NASDAQ:LRCX)?

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With its stock down 12% over the past three months, it is easy to disregard Lam Research (NASDAQ:LRCX). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Lam Research’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for Lam Research

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Lam Research is:

65% = US$3.9b ÷ US$6.0b (Based on the trailing twelve months to June 2021).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.65 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Lam Research’s Earnings Growth And 65% ROE

To begin with, Lam Research has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 15% the company’s ROE is quite impressive. This likely paved the way for the modest 20% net income growth seen by Lam Research over the past five years. growth

Next, on comparing Lam Research’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 17% in the same period.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for LRCX? You can find out in our latest intrinsic value infographic research report.

Is Lam Research Making Efficient Use Of Its Profits?

Lam Research has a three-year median payout ratio of 26%, which implies that it retains the remaining 74% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Lam Research is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 15% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change by much.

Conclusion

On the whole, we feel that Lam Research’s performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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