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A Side-by-side Analysis of Lam Research Corporation (LRCX) and Celgene Corporation (CELG)

Lam Research Corporation (NASDAQ:LRCX) shares are down more than -24.06% this year and recently decreased -3.25% or -$4.69 to settle at $139.78. Celgene Corporation (NASDAQ:CELG), on the other hand, is down -19.29% year to date as of 10/10/2018. It currently trades at $84.23 and has returned -8.32% during the past week.

Lam Research Corporation (NASDAQ:LRCX) and Celgene Corporation (NASDAQ:CELG) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect LRCX to grow earnings at a 13.12% annual rate over the next 5 years. Comparatively, CELG is expected to grow at a 19.62% annual rate. All else equal, CELG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 41.39% for Celgene Corporation (CELG). LRCX’s ROI is 33.30% while CELG has a ROI of 20.00%. The interpretation is that LRCX’s business generates a higher return on investment than CELG’s.

Cash Flow



Cash is king when it comes to investing. LRCX’s free cash flow (“FCF”) per share for the trailing twelve months was +3.17. Comparatively, CELG’s free cash flow per share was +1.57. On a percent-of-sales basis, LRCX’s free cash flow was 4.36% while CELG converted 8.49% of its revenues into cash flow. This means that, for a given level of sales, CELG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. LRCX has a current ratio of 2.90 compared to 1.50 for CELG. This means that LRCX can more easily cover its most immediate liabilities over the next twelve months. LRCX’s debt-to-equity ratio is 0.38 versus a D/E of 6.20 for CELG. CELG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LRCX trades at a forward P/E of 7.95, a P/B of 3.46, and a P/S of 1.94, compared to a forward P/E of 7.93, a P/B of 17.58, and a P/S of 4.26 for CELG. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. LRCX is currently priced at a -37.19% to its one-year price target of 222.53. Comparatively, CELG is -24.56% relative to its price target of 111.65. This suggests that LRCX is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. LRCX has a beta of 1.35 and CELG’s beta is 1.38. LRCX’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 5.25 compared to a short interest of 2.25 for CELG. This implies that the market is currently less bearish on the outlook for CELG.

Summary

Lam Research Corporation (NASDAQ:LRCX) beats Celgene Corporation (NASDAQ:CELG) on a total of 9 of the 14 factors compared between the two stocks. LRCX generates a higher return on investment, 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 book value and sales basis, LRCX is more undervalued relative to its price target. Finally, OXY has better sentiment signals based on short interest.

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