Fri Aug 29 2014
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David Einhorn Owns $189 Million Of This ‘Boring’ Company

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Although the market often looks to the world’s top investors for direction on highly-publicized stocks, investing gurus can also lead us to great companies we might never hear about otherwise.

Take the famous hedge fund manager David Einhorn, founder and president of Greenlight Capital, which manages an investment portfolio of more than $ 7 billion.

In Greenlight’s latest 13-f filing for the second quarter, Einhorn revealed he’d more than doubled his position in what most investors would consider a relatively obscure and rather boring technology stock:Lam Research Corp. (Nasdaq: LRCX).

At this point, he owns 2.6 million shares with a market value of approximately $ 189 million based on a recent stock price of about $ 72. With a 2.5% weighting in Einhorn’s long portfolio –Greenlight makes short bets, too — the expanded position is now quite substantial.

And it’s already paying off. Shares are up by about 7% since the end of the Q2. Einhorn first established a position in the stock in Q1. Since then, the stock has risen by more than 30%.

What makes LRCX so “boring” is its role in semiconductor processing. Specifically, it supplies manufacturers with the equipment necessary for etching — the precise removal of material from unprocessed wafers to create well-defined circuits. Lam also provides specialized equipment used to place thin, conductive films on chips, and other tools that clean chips, a step that occurs at various points in the manufacturing process.

What’s not so boring is that these steps are crucial for all semiconductor production and Lam dominates this aspect of the market. For instance, it is number one in etch. It controls roughly half the market for etching equipment, management estimates.

Among its customers are very large, well-known firms like Samsung Electronics (OTC: SSNLF), Taiwan Semiconductor (NYSE: TSM) and SK Hynix (OTC: HSXCL), which together account for nearly half of Lam’s total revenue. In addition, Lam is a supplier for a number of smaller semiconductor makers throughout the Asia-Pacific region.

Sales have been exceptional, climbing nearly fourfold from $ 1.1 billion in 2009 to almost $ 4.4 billion during the past 12 months. Growth should remain above average because Lam dominates three key semiconductor markets and has the ability to meet growing equipment demand. This demand stems from the need to produce more, ever-smaller and more complex chips.

For instance, Samsung and other manufacturers of dynamic random access memory (DRAM) — chips commonly found in PCs, workstations and mobile devices — are quickly transitioning to 25- and 20-nanometer (nm) sizes and away from the 30-nm variety. That’s because smaller chips perform better and use less energy. The overall DRAM market is set to expand by about 6% to $ 37.9 billion this year, analysts say.

According to analysts at Nomura, 3D NAND should be another attractive opportunity for Lam. This new, very hard-to-manufacture type of flash memory involves vertically stacking improved versions of the two-dimensional chips currently used (hence the term 3D NAND). The thicker the stack, the greater the amount of flash memory.

3D NAND is clearly the next step in the evolution of flash memory, which is used in digital cameras, USB flash drives and other devices. With Samsung and its other major customers all rushing to prepare 3DNAND for mass production, Lam should be a major beneficiary of this transition in what’s already roughly a $ 20 billion market. The added difficulty of manufacturing 3D NAND should only help Lam cement its reputation as a top expert in its field.

Currently, only Samsung claims to be mass producing 3D NAND, although analysts point out the evidence of this remains to be seen as the technology is still quite rare. The consensus seems to be that 3D NANDwill begin making a widespread appearance in more like a year or two, once mass production techniques are optimized.

Because of its growing dominance and crucial part in semiconductor production, Lam is capable of the 27% earnings growth rate that analysts project for the next five years. Thus, upside during that time is on the order of 95% to about $ 141 from $ 72 now. This assumes a relatively modest earnings multiple of 15, which is quite a bit lower than the current multiple of 25.

Risks to Consider: Besides getting a big chunk of revenue from just three customers, Lam faces heavy competition from its main rival Applied Materials (Nasdaq: AMAT), which has about a 20% market share. The competition will only intensify when Applied completes its merger with another major semiconductor equipment maker, Tokyo Electron (OTC: TOELY), later this year.

Action to Take –> The work Lam Research does may not be particularly interesting, but David Einhorn’ssubstantial stake in the firm says a lot about its investment merit. Remember, though, we’re talking about a tech stock in the semiconductor space, so it’s definitely on the riskier side. Potential investors should thoroughly research the company for themselves and follow Einhorn into Lam Research if the stock is appropriate for their portfolios, too.

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