John,
Agree with you on LRCX's great valuation.
To play with the numbers a bit...
Let's just assume that the company loses $.25/Share (a $.25 loss is the "trough-post-restructuring-quarterly-EPS" in most people's expectations) for the next eight quarters. This would have the effect of lowering book from $13.68 (6/98 Balance Sheet) to $11.68 (roughly the current price). So, in this scenario, if "forward book" were holding up the stock, then this would be a fair-ish valuation.
Now, let us pick on Gunnar Miller at Goldman (he can take it...he'll just cry his way to the bank).
On a quarterly basis his EPS progression walks like this (June Fiscal Year... SO WE ARE CURRENTLY IN Q1 FISCAL 1999):
Q1 99: ($.25) Q2: ($.16) Q3: $.18 Q4: $.43
On a quarterly basis his ORDER progression walks like this (June Fiscal Year):
Q1 99: $175 Q2: $250 Q3: $275 Q4: $300
On a quarterly basis his REVENUE progression walks like this (June Fiscal Year):
Q1 99: $200 Q2: $225 Q3: $250 Q4: $275
On a quarterly basis his GROSS MARGIN % progression walks like this (June Fiscal Year):
Q1 99: 37.8% Q2: 39.0% Q3: 42.0% Q4: 44.0%
On a quarterly basis his R&D as % REVs progression walks like this (June Fiscal Year):
Q1 99: 23.0% Q2: 23.0% Q3: 20.0% Q4: 19.0%
On a quarterly basis his SG&A as % REVs progression walks like this (June Fiscal Year):
Q1 99: 22.0% Q2: 20.0% Q3: 18.0% Q4: 16.0%
He maintains a 30% Tax Rate.
Interest Income and Interest Expense offset each other ... which makes sense given LTD at a blended 5% on $334.2 and C&E earning ~3.7% on $448.6.
What does it all mean? These are "The Numbers according to GM at GS."
He has the company reporting in 10 months a $.43 quarter (or a $1.72 run rate). Obviously, LRCX demonstrates a tremendous amount of operating leverage between 3Q and 4Q -- on revenue numbers that are not outrageous (?) So, one would have to believe, in a normal-ish recovery, Q1 00 will be sequentially stronger than Q4 99. So, perhaps the 4Q number demonstrates a number well in excess of $2.00 for the June 00 Fiscal Year. So, in 22 months we would expect that the company would post something "well north of $2.00" in EPS for its FY2000. Let's assume "well north" is $2.75...[e.g., Q1: $.56 Q2: $.65 Q3: $.72 Q4: $.82]...So, the stock is trading somewhere between 4.3x's and 5.9x's Fiscal 2000 EPS [based on $2.75-$2.00 in EPS, respectively].
On a calendar basis...let us just assume EVEN MORE MODEST upticks from the $.43 quarter on a sequential basis...so Calendar Q3 (=Q1 00 in LRCX's Fiscal Year) would come in at $.51 and Calendar Q4 would be $.56. This would yield a CY1999E of $1.27. So, the stock is currently trading roughly 9.3 x's AN EVEN MORE MODEST Calendar 1999E.
Now, the market is an "efficient discounting machine." Clearly, their is a great deal of uncertainty surrounding all of those numbers. Perhaps, this is the right price for LRCX?
Then again, we have learned that the SemiCaps do not actually trade based on earnings. History would show that you want to exit before the peak EPS numbers...just as you want to enter before the recovery numbers.
So, some think that these things trade based on the order book. Our man Gunnar has the orders bottoming in the current quarter at a paltry (?) $175mm. Logically, the December quarter would demonstrate "a turn" in the order book. Does that mean that the stock would "move" in January (5 months from now) when the orders are reported? If so, how much? $13.5 (+15%)? $14.5 (+23%)? $15.5 (+32%)?
Or does the stock "move" in October after the Conference Call when Mercedes Johnson gives the guidance for a "modest uptick" in the order book from $175 to $250 (+43%)?
Sorting through this twaddle is a mind-numbing exercise. I think it can be reduced to a more simple exercise:
1) I am comfortable that LRCX will not go out of business.
2) At some point in the next 2 years LRCX will report $2.00/Share [This could be significantly higher...by 2x+].
3) With $2.00 in EPS the company deserves at least a 10 P/E.
4) This would yield a stock price of $20 (+70%).
5) If that takes 2 years, my return is still in +30% per year.
6) These numbers could be far higher. A 10 P/E on $4.00 ($40 +240%)? A 12 P/E on 3.50 ($42 +257%)? A 15 P/E on $3.25 ($48.75 +315%)? A 15 P/E on $4.00 ($60 +410%)?
7) Who cares? I have a minimum hurdle rate of +30%/Year and I can get there using conservative (IMHO) numbers.
8) I have no idea where the bottom is or when the turn comes...but I would guess that it happens some time in the next 1 1/2 years.
In short: I am extremely compelled. Painfully so.
--Duker
P.S., Have a great Labor Day Weekend. |
