From this chapter’s analysis, the stock price of Lam Research was higher than that
of Applied Materials at the end of 2006. This result is consistent with what we have been discussed in Chapter Four. That is to say, with better profitability and growth indexes, Lam’s stock value is higher than Applied’s.
Also by comparing to the market price, our forecasted prices are within +/- 10%
range. EVA gives a slightly smaller difference from actual stock price than PE Ratio method does. But from both methods, LRCX seems to be undervalued at that time.
The later on (two months later) stock price rise seems to support our valuation result.
Chapter Six: Conclusion and Recommendations
In this chapter, we will examine the result we derived in this study. We will also present our recommendations for these two companies’ future development. At the last, we will discuss the limitation of this study and also recommendations for future study.
6.1 Conclusion and Recommendations toward companies in this case
Let us present this section by having a review of the goals set in Chapter One.
1. To analyze the operation efficiency and business valuation of these two companies through the EVA method.
Operation efficiency has been discussed in Chapter Four. We get to understand the operation of these two companies from the EVA point of view. Since Applied Materials accounts for quite a big chunk of the whole WFE business, so it is suitable to be used for benchmarking purpose; while Lam Research on the other hand, has clearly set a higher bar for both indexes (ROIC-WACC spread and Invested Capital Turnover) in this industry.
Business valuation has been covered in Chapter Five. The valuation result is compared to the market price and is confirmed to be within +/- 10% difference. This may be due to that these two companies are traced regularly by many analysts. It has been briefly discussed that Lam’s stock price seems to be undervalued by -8.8 % in August, 2006 and was later recovered and even surpassed by +8.7% within two months.
2. Come out an analysis of how Lam Research went through the past five years and achieved the changes.
For Lam Research, we have seen a continuous upward trend for both ROIC-WACC spread and also Invested Capital Turnover starting from
2003. Part of it is seems to be a natural result of the revenue increase due to economies of scale effect, but clearly the company has managed to keep the pace of invested capital growth slower than the revenue growth in order to get this achieved. We believe the following reasons are the foundation of these changes:
Strong engineering and service team: The revenue growth is mostly attributed to the success of Lam’s Dielectric etcher product. Although relatively late to the market in the 300 mm arena, its intrinsic superiority in technology and productivity supported by the continuous improvement projects has proven to address customer’s needs. This is the fruitful result of long term investment in technology development and joint development relationships. Combined with the original well performed Conductor etch product, Lam was pushed to the etch market share leader for the past 5 years.
“Respect the data” spirit: Particularly, Lam has an important spirit that is intrinsic to its big engineering community and other organizations:
respecting the data. People are really concentrating on projects and make daily decisions based on the real engineering data. This nurtures the atmosphere of fantastic engineering environment and becomes the root of its engineering excellency. There is relatively less effort spent dealing with office politics. Combined with dedicated account structure to support its customers, Lam is able to provide speed to solutions.
Outsource non-core activities: Lam has outsourced several of the non-core activities like Legacy tool manufacturing, IT support function and also Spare parts management to save cost and boost efficiency.
Dedicated operation organization team: A dedicated CSBG (Customer
Satisfaction Business Group) organization has been formed to look at the operation efficiency of warranty tool performance. This kind of attention-to-details mindset helped to drive the best of breed FAST QUAL new tool installation and start-up and installation base performance. The weekly review includes both material and manpower resources allocation.
This of course in term helps to accomplish the ultimate performance of Invested Capital Turnover. Basically, you get what you monitor. Also there is dedicated personnel for service and spares business operation.
Back to about 5 years ago, Lam even bought a book “Lean Thinking” by James P. Womack for its middle managers trying to get this operation excellency rooted deep. I think this $26 dollar book is well paid off now.
Careful funding projects management: From strategic point of view, Lam has been cautious to pick up the most lucrative markets to attack.
Before making a decision, the ROI (Return-on-Investment) analysis is carefully evaluated down to project level even the project is only one or two employee’s effort. This is based on the understanding that any company resource is not only precious but also scarce. The power is so huge while this spirit cascades down to the engineers’ level.
3. Based on the business valuation view point, formulate the recommended strategies of these two companies’ future development.
For Lam Research:
Adjacent market engagement: Since Lam has gained a lot of momentum from the revenue growth and this is mostly a direct result of market share growth. With the existing high market share that it already achieved (around 50%); the room for further growth may be somewhat
can leverage the current Lam expertise and resources. Lam is actually already doing so. As put by Lam’s CFO Martin Anstice in F3Q07 (Qtr End 3/25/07) Earnings Call, “Lam's development of new products adjacent to the Etch market that provide the opportunity to double our served available market and potentially grow the company 2.5 times faster than the overall total growth in wafer fab equipment spending through 2010.” Considering our forecasting of CAGR 8% from 2005 to 2011 in Chapter 3, the prediction made by Mr. Anstice is suggesting a 20% revenue growth rate annually. This is greater than the 15% CAGR of Lam’s revenue from 2002 to 2006 already.
M&A: The other thing that may worth considering is the acquisition of other companies. With current management team experience, there may be chance that Lam can leverage the learning gained from the past several years and create another change. After all, the experience includes both improvements in ROIC-WACC spread and also invested capital turnover.
Both these may have chance to be duplicated in another similar companies that experiences similar situation as Lam did back before 2002.
Knowledge management and People retention: Trying to stay at our current position for our current business alone is not going to be easy.
Lam’s strongest competitors are the number one and number two players in the WFE industry: Applied Materials and Tokyo Electron. These two companies have great resources and capabilities that they have demonstrated repeatedly they can turn things around over the past 20 years.
So it is important for Lam to be able to hold on to everything that is already possessed and achieved. This includes getting patents for our precious technologies, keeping experienced people working for us still,
implement and leverage the knowledge acquired with hard work.
Optimize the capital structure: The other thing that we found in this analysis is that maybe Lam could lower down the WACC by having higher percentage of debts in stead of equities. WACC of Lam’s is almost 2%
higher than that of Applied’s and this has caused some impact to the company value. For example, if we can drop the WACC to something similar to that of Applied by doing so, Lam’s stock value can be boosted up from the original 46.05 to 53.97, a 17% gain!
For Applied Materials:
Be bold on expansion: Applied Materials is qualified to own good business and good managers. Being dominating at almost all major markets in WFE, it is a wise idea to engage in new markets. Compared to companies like GE, there is still room to grow, and to diversify. After all, with all the talents within the company, it is a pity not to utilize it to its most.
Enhance its operational excellence: As for the WACC-ROIC spread and Invested Capital turnover indexes, clearly there is still room for improvement.
This research has completed the evaluation of these two companies. It has also helped to formulate the recommendations for their future directions. The activities ratios together with the ROIC-WACC spread of Lam Research can also be used for benchmarking purposes for other WFE suppliers.
6.2 Limitations of this research
The limitations of this research include the following:
1. While forecasting NOPAT and Invested Capital, liner regression method is used. There are other more complex regression methods which may be better at forecasting.
2. WFE industry has a strong cyclical effect. It will be the best to do forecasting with this factor considered.
3. The financial data taken for this extrapolation are yearly data and only starts from 2002 to 2006. A quarterly data analysis may be helpful to add more data points to increase the solidity of this study.
4. Lam research and Applied Materials constantly starts many new business segments that may not be able to profit within 3 years. The valuation will be more accurate of if these activities could be separated.
6.3 Recommendations for further research
More study could be conduced to better answer the questions about how Lam went through the past years and achieved the changes.
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