With analysts forecasting Lam Research Corporation (NASDAQ:LRCX) to produce robust earnings growth of 15.98% annualised over the few years to come, it’s necessary to take a moment and reflect on this positive outlook. Those invested in the stock should contemplate the factors that are spurring this growth, as there are certain implications that can impact on shareholder return. To get a preliminary understanding, this article will interpret Lam Research’s margin performance to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for LRCX’s returns relative to its competitors.Check out our latest analysis for Lam Research
Breaking Down LRCX’s Profit Margin
In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating LRCX’s profit margin.
Margin Calculation for LRCX
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = US$1.89b ÷ US$10.30b = 18.32%
Lam Research’s margin has expanded in the past five years, with a 33.43% average growth in net income exceeding a 19.54% average growth in revenue, which suggests that the company has been able to convert a larger percentage of revenue into net income whilst grow their top line at the same time. The current 18.32% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
Understanding what could be driving Lam Research’s future earnings
Based on future expectations, LRCX’s profit margin will expand further, with an expectation of 7.43% in annual revenue growth and 15.98% earnings growth expected annually. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. However, those interested in the company should remember that margin expansion can hold various implications on the company’s performance depending on how it operates, which makes further research very important. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For Lam Research in particular, future profit margin is expected to expand simultaneously with Semiconductor industry margins, and at the same time, the forecasted ROE of Lam Research is greater than the industry at 35.17% and 13.89% respectively, although it must not be forgotten than this result is influenced by the company’s debt levels. This serves as an indication of the confidence amongst analysts covering that stock that the nature of Lam Research’s earnings will result in a higher return per dollar of equity compared to the industry. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don’t always give the full picture. Thus, it is essential to run your own analysis on Lam Research’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For LRCX, I’ve put together three pertinent factors you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is LRCX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LRCX is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of LRCX? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!