Lam Research Corporation (NASDAQ:LRCX) and Teradyne, Inc. (NYSE:TER) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LRCX to grow earnings at a 20.90% annual rate over the next 5 years. Comparatively, TER is expected to grow at a 14.30% annual rate. All else equal, LRCX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Lam Research Corporation (LRCX) has an EBITDA margin of 26.75%, compared to an EBITDA margin of 27.58% for Teradyne, Inc. (TER). This suggests that TER underlying business is more profitable. LRCX’s ROI is 18.10% while TER has a ROI of -2.20%. The interpretation is that LRCX’s business generates a higher return on investment than TER’s.
If there’s one thing investors care more about than earnings, it’s cash flow. LRCX’s free cash flow (“FCF”) per share for the trailing twelve months was +3.33. Comparatively, TER’s free cash flow per share was +0.96. On a percent-of-sales basis, LRCX’s free cash flow was 6.75% while TER converted 10.84% of its revenues into cash flow. This means that, for a given level of sales, TER is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. LRCX has a current ratio of 3.10 compared to 4.70 for TER. This means that TER can more easily cover its most immediate liabilities over the next twelve months. LRCX’s debt-to-equity ratio is 0.42 versus a D/E of 0.18 for TER. LRCX is therefore the more solvent of the two companies, and has lower financial risk.
LRCX trades at a forward P/E of 13.42, a P/B of 4.35, and a P/S of 3.70, compared to a forward P/E of 17.64, a P/B of 3.66, and a P/S of 3.86 for TER. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. LRCX is currently priced at a -4.52% to its one-year price target of $191.47. Comparatively, TER is -4.75% relative to its price target of $39.60. This suggests that TER 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 2.00 for LRCX and 2.10 for TER, which implies that analysts are more bullish on the outlook for TER.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. LRCX has a beta of 1.53 and TER’s beta is 0.97. TER’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. LRCX has a short ratio of 4.92 compared to a short interest of 3.30 for TER. This implies that the market is currently less bearish on the outlook for TER.
Teradyne, Inc. (NYSE:TER) beats Lam Research Corporation (NASDAQ:LRCX) on a total of 8 of the 14 factors compared between the two stocks. TER is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. TER is more undervalued relative to its price target. Finally, TER has better sentiment signals based on short interest.