Applied Materials, Inc. (NASDAQ:AMAT) shares are up more than 74.65% this year and recently increased 1.59% or $0.88 to settle at $56.36. Lam Research Corporation (NASDAQ:LRCX), on the other hand, is up 96.15% year to date as of 11/10/2017. It currently trades at $207.39 and has returned 0.15% during the past week.
Applied Materials, Inc. (NASDAQ:AMAT) and Lam Research Corporation (NASDAQ:LRCX) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AMAT to grow earnings at a 28.63% annual rate over the next 5 years. Comparatively, LRCX is expected to grow at a 17.70% annual rate. All else equal, AMAT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 28.68% for Lam Research Corporation (LRCX). AMAT’s ROI is 17.30% while LRCX has a ROI of 18.10%. The interpretation is that LRCX’s business generates a higher return on investment than AMAT’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. AMAT’s free cash flow (“FCF”) per share for the trailing twelve months was +1.09. Comparatively, LRCX’s free cash flow per share was +3.95. On a percent-of-sales basis, AMAT’s free cash flow was 10.74% while LRCX converted 7.98% of its revenues into cash flow. This means that, for a given level of sales, AMAT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. AMAT has a current ratio of 2.90 compared to 3.30 for LRCX. This means that LRCX can more easily cover its most immediate liabilities over the next twelve months. AMAT’s debt-to-equity ratio is 0.61 versus a D/E of 0.35 for LRCX. AMAT is therefore the more solvent of the two companies, and has lower financial risk.
AMAT trades at a forward P/E of 15.39, a P/B of 6.92, and a P/S of 4.35, compared to a forward P/E of 13.77, a P/B of 4.63, and a P/S of 3.80 for LRCX. AMAT is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AMAT is currently priced at a -5.56% to its one-year price target of 59.68. Comparatively, LRCX is -8.55% relative to its price target of 226.78. This suggests that LRCX is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for AMAT and 1.90 for LRCX, which implies that analysts are more bullish on the outlook for LRCX.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AMAT has a beta of 1.84 and LRCX’s beta is 1.65. LRCX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. AMAT has a short ratio of 1.06 compared to a short interest of 5.38 for LRCX. This implies that the market is currently less bearish on the outlook for AMAT.
Lam Research Corporation (NASDAQ:LRCX) beats Applied Materials, Inc. (NASDAQ:AMAT) on a total of 9 of the 14 factors compared between the two stocks. LRCX is growing fastly, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, LRCX is the cheaper of the two stocks on an earnings, book value and sales basis, LRCX is more undervalued relative to its price target. Finally, RLOG has better sentiment signals based on short interest.