How far off is Lam Research Corporation (NASDAQ:LRCX) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
View our latest analysis for Lam Research
Crunching the numbers
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) forecast
|Levered FCF ($, Millions)||US$2.65b||US$3.05b||US$3.49b||US$3.81b||US$4.08b||US$4.32b||US$4.52b||US$4.69b||US$4.85b||US$5.00b|
|Growth Rate Estimate Source||Analyst x7||Analyst x4||Analyst x1||Est @ 9.31%||Est @ 7.19%||Est @ 5.7%||Est @ 4.65%||Est @ 3.92%||Est @ 3.41%||Est @ 3.05%|
|Present Value ($, Millions) Discounted @ 9.5%||US$2.4k||US$2.5k||US$2.7k||US$2.7k||US$2.6k||US$2.5k||US$2.4k||US$2.3k||US$2.1k||US$2.0k|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$24b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 9.5%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$5.0b× (1 + 2.2%) ÷ (9.5%– 2.2%) = US$71b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$71b÷ ( 1 + 9.5%)10= US$29b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$53b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$309, the company appears about fair value at a 15% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Lam Research as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 9.5%, which is based on a levered beta of 1.207. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Whilst important, the DCF calculation ideally won’t be the sole piece of analysis you scrutinize for a company. It’s not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Lam Research, there are three essential aspects you should further examine:
- Risks: You should be aware of the 3 warning signs for Lam Research we’ve uncovered before considering an investment in the company.
- Future Earnings: How does LRCX’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.
Trump claims first presidential debate will be ‘unfair’
Donald Trump has claimed the first presidential debate next week will be “unfair.”
Mr Trump said in a radio interview that veteran moderator Chris Wallace was “controlled by the radical left” and would not ask Joe Biden tough questions.
“Chris is good, but I would be willing to bet that he won’t ask Biden tough questions,” the president told Brian Kilmeade on Fox News Radio.
“He will ask tough questions of me and it will be unfair, I have no doubt about it. He will be controlled by the radical left.”
Trump insisted he had “a lot of respect” for Wallace and a good relationship with his father, Mike Wallace.
Mr Kilmeade was quick to push back against Mr Trump’s accusations about his Fox News colleague.
“Mr President, I will tell you for sure, he is not controlled by anyone,” said Mr Kilmeade.
“We’ll see. Then he’s got to ask tough questions of Biden,” Trump said.
Mr Wallace will moderate the first presidential debate in Cleveland, Ohio, on Tuesday.
Both candidates will be asked questions on their records, the coronavirus, the Supreme Court, the economy, race and violence in US cities, and election integrity.
Trump appeared to try and lower expectations of his performance, insisting that Mr Biden had a significant advantage.
“No, I think I am the one without experience. I have just been doing this for a few years. He has been doing this for 47 years plus,” said Mr Trump.
“I mean, he has a tremendous advantageous really, if you think about it, but I have a much better record than he does.”
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Getting Real About Electric Cars, Batteries and Hype
(Bloomberg Opinion) — In the world of cars, investors seem to love news of partnerships, synergies and cost-savings as expensive tech upends long-held rules of the road. They may need a reality check.
Auto companies across the globe are looking for their next green partner, even if they have their own grand plans for electric vehicles. But cautionary tales are emerging of why the best way into this brave new world – compelled by a regulatory push and sky-high Tesla Inc.-like valuations – may be to seize the wheel on their own.
A quick check of how some hyped-up partnerships have fared couldn’t make things clearer.
General Motors Co., which has made an aggressive push into electric vehicles, decided it was time to take an 11% equity stake worth about $2 billion in upstart Nikola Corp. Going by the risks in Nikola’s prospectus, this was a tie-up too far. Per the release, GM is giving “the in-kind services and access to General Motors’ global safety-tested and validated parts and components” — basically, most of the things Nikola needs to make trucks.
Investors seemed to love the idea. Think: Traditional car company shows it has accessories for the future – electric and hydrogen. GM’s share price rose as much as 8% on the day. Nikola’s surged almost 40%. The Phoenix-based company would save $4 billion on battery and powertrain costs, the core of its business. GM would receive that much in benefits, between the equity value, electric vehicle credits, contract manufacturing, and supply of batteries and fuel cells.It doesn’t look like there’s that much value in it now, with Nikola under investigation and its executive chairman resigning. The stock has dropped almost 80% from its June peak, when it went public via a special purpose acquisition company. In fact, GM – like other car companies – is the one that likely needs the cost savings. Investors should wonder why. Sure, the Detroit giant was keeping promises. GM has said it has allocated $20 billion to electric cars and autonomous vehicles from this year to 2025. Chairman and Chief Executive Officer Mary Barra has laid out green ambitions in clear terms: “We want to put everyone in an EV, and we believe we have what it takes to do it.” It isn’t clear what additional value Nikola would have brought. Besides, of course, the innovation hype. Barra has said GM conducted “appropriate diligence” before entering the deal. Carmakers have been setting unrealistic targets for a while. In 2017, Volkswagen AG put out a plan to make higher-density batteries in three years, according to HSBC Holdings Plc analysts. Part of the program was to bring the cost down to $120 per kilowatt hour. Today, the price remains well above $140 per kilowatt hour, and the density is still lower.
Even if banding together theoretically lowers costs, what happens to competitive advantage? Bottom lines? Cheaper batteries are great, but carmakers count on high margins from expensive cars. The facts are that the pressure to make better, safer batteries is rising, and they’re in short supply.
Consider the volatile relationship between Tesla and Panasonic Corp. The latter (and its stock price) has had a rocky ride with Elon Musk’s whims. For all the hope the partnership has generated, the Japanese consumer products icon hasn’t made much money from it. After a few ups and downs, the companies penned a new three-year agreement in June in which Tesla buys a certain number of batteries and makes future investments. But, here’s the thing: Tesla is looking elsewhere, too.On Tuesday, Musk tweeted that he would also purchase batteries from several best-in-class manufacturers, like South Korea’s LG Chem Ltd. and China’s Contemporary Amperex Technology Co., the world’s largest producer. Tesla has been looking for ways to jump-start its own battery manufacturing, reflected in the acquisition of Maxwell Technologies Inc. The biggest takeaway from Tesla’s much-watched battery day was Musk’s promise of a (much cheaper) $25,000 electric car and what that would do to reduce the price of its most important component.
A number of other ventures exist in various forms: Volkswagen with NorthVolt AB, and with Guoxuan High-Tech Co.; Geely Automobile Holdings Ltd. and LG Chem; Daimler AG and Farasis Energy Gan Zhou Co., LG Chem and GM. The list goes on. It’s unclear whether any will produce what the market needs anytime soon: an affordable and safe electric car with efficient batteries (ignoring all the other costs of ownership, such as charging infrastructure and resale price).
What additional value, then, is there from partnerships? For whatever thoughts car companies may have of going it alone, battery makers are increasingly taking pole position. Some are beginning to break even. The top six account for more than 80% of the market and are pushing for pricing power. Whoever produces cars needs batteries. It’s still simpler for automakers to outsource them than go it alone. If partnerships are done right – with capital, manufacturing prowess and real, tangible results – they can succeed. Toyota Motor Corp. has been working with Panasonic for years. It recently set up a joint-venture company that could work well enough to seem boring.
For now, investors shouldn’t be wowed by glitzy tie-ups and promises. Keeping an eye on where the real returns are — like actual cars on the road and batteries that take us further, and the companies making them — may serve better.
(An earlier version misidentified Nikola Executive Chairman Trevor Milton as CEO and incorrectly stated that GM had sunk $2 billion into an 11% equity stake in the company. )
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
For more articles like this, please visit us at bloomberg.com/opinion
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©2020 Bloomberg L.P.
Who Invited the Far-Right Oath Keepers to Downtown Louisville?
LOUISVILLE—On Wednesday night, at least 20 members of the Oath Keepers, a far-right militia group, were observed guarding storefronts in downtown Louisville amid sometimes violent unrest over the lack of charges in the police killing of Breonna Taylor. The businesses included Bader’s Food Mart—which is also a Shell gas station—Stewart’s Pawn Shop, and Hampton Inn Downtown Louisville, all at or near the intersection of Jefferson and South 1st Street. All of the businesses, besides the hotel, appeared to be closed at the time.
The heavily armed men—many bearing rifles, night-vision goggles, and wearing camouflage—were seen on the roof of Stewart’s Pawn Shop, the perimeter of the Shell station, and in the Hampton Inn parking lot. When asked why they were present, one militia member, who gave his name only as Angry Spongebob, said the owner of the Shell had received threats against the business.
“She was told that people wanted to burn it down to the ground,” he told The Daily Beast. “We know her and so we came out to help protect it, because if it goes up, then it takes a significant portion of this block with it.”
He didn’t clarify who “she” referred to, but records filed with the Kentucky Secretary of State’s office list Paula T. Bader as the president, secretary, and treasurer of Bader’s Food Mart, and she has been identified as the owner in local media reports. In a telephone conversation Thursday, a purported leader of the Oath Keepers on the ground in Louisville, who gave his name as Mike Whipp, said they had been invited by Bader to keep tabs on her business, as well as the pawn shop.
According to Whipp, “[Bader] told us she was targeted by activists.”
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Bader could not immediately be reached for comment, but the food mart does have a history of violence—and of drawing activist ire.
In July, an employee was reportedly shot during an armed robbery attempt. And early this month, an employee reportedly shot a customer after a verbal altercation, according to local police. The individual was fired and later charged with assault.
On Sept. 4, a day after the employee allegedly shot a customer, activists with megaphones entered the store, leading Bader to close the place for several days.
“He was wrong,” she told local outlet WDRB of her fired employee. But she also seemed to take umbrage at the prospect of being targeted by local activists.
“They were waiting on customers,” she said. “The next thing they know, the store is full of people with the megaphones.”
That day, an account listed under Bader’s name posted on Facebook, “This is the damage, looting and peaceful protesting that occurred at my store. Bader’s Food Mart last night. Do you notice the small children. SMH.”
When asked Thursday about the presence of a far-right militia group, a man who identified himself as the manager of Stewart’s Pawn Shop and gave only the first name Jeremy told The Daily Beast, “I just work during the day from 9 a.m. to 6 p.m. and have no idea if our owners made a deal with those guys.”
When asked about the Shell station, he added, “I do know if it burns, it will harm a lot of people in the city.” Shell corporate did n0t immediately respond to a request for comment.
Reached for comment Thursday, Stuart Stein, who is listed in state records as an incorporator of the pawn shop, confirmed he was an owner, but told The Daily Beast, “No comment, talk to someone at the store.” Attempts to reach other individuals listed on incorporation paperwork were unsuccessful.
For her part, Mindy Wilson, general manager of Hampton Inn Downtown, told The Daily Beast of the militia, “We don’t know anything about them, so you can stop calling.” Hilton Corporate did not immediately respond to a request for comment.
Oath Keepers are a virulently anti-government group founded in 2009 by Stewart Rhodes, a former Ron Paul aide. They have been a fixture at protests and political hot spots in recent years, from Ferguson to Trump rallies, and have been banned from Twitter after peddling conspiracy theories expressing thirst for Civil War.
Followers have also been implicated in a slew of violent crimes in recent years, from bomb scares to threats against the government to rape, according to the Southern Poverty Law Center.
Members of the Oath Keepers group in Louisville claimed they were made up of patriots, Kentuckians, Louisville residents, former and retired members of the military, firefighters, and law enforcement who were merely trying to protect their community. The member who identified himself as Angry Spongebob expressed condolences to the family of Taylor, a 26-year-old emergency medical technician who was fatally shot during a botched attempt to serve a warrant on her home.
Spongebob said burning the city down was misguided and unfair to the public. There was no evidence of this taking place, despite sporadic small fires in garbage cans on Wednesday.
“Go to Frankfort, go to City Hall, don’t take out frustrations on private business owners,” Spongebob told The Daily Beast, blaming the lawlessness on elected officials like Attorney General Daniel Cameron, who declined to charge any cop for killing Taylor.
As they often have at protests in recent weeks, the militiamen seemed to operate without harassment from local law enforcement, at least in the hours The Daily Beast observed them after the 9 p.m. curfew on Wednesday. Louisville Metro Police and the Kentucky National Guard did not immediately respond to requests for comment.
Meanwhile, police said they made 123 arrests, mostly for unlawful assembly and curfew violations, on Wednesday. At least three journalists were reported to be among them. At least two officers were also shot during the chaos.
Whipp, the Oath Keeper spokesperson, suggested there was no reason for his group to catch flak for being out past curfew. This despite increased scrutiny of the seemingly cozy ties between armed vigilantes and police after 17-year-old Kyle Rittenhouse—who allegedly shot and killed two protesters in Kenosha, Wisconsin, in August—walked by cops unbothered shortly afterward. On the streets that night, Rittenhouse had attached himself to what amounted to an armed gang of militiamen.
“We generally don’t have trouble from the police,” Whipp told The Daily Beast. “Police did perceive one of our members as a threat, but we calmed them down, and stated our purpose.”
Read more at The Daily Beast.
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