Lam Research's price surge today seems to be confirming the bullish analyst outlook on the stock. Ending the Friday session at $445.27, LRCX posted 6.8% gains, pushing the valuation of the stock even higher. Might the stock be overvalued, despite its buy rating?
The most common valuation metric for stocks is the trailing price to earnings (P/E) ratio. Lam Research has a P/E ratio of 18.8 based on its 12 month trailing earnings per share of $23.65. Considering its future earnings estimates of $32.42 per share, the stock's forward P/E ratio is 13.7. In comparison, the average P/E ratio of the Technology sector is 26.5 and the average P/E ratio of the S&P 500 is 15.97.
We can also compare the ratio of Lam Research's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present liquidation value -- or what would be left if the company sold off all its assets and paid off all of its debts today. Importantly, the book value does not include intangible assets such as the value of its brand and the goodwill of its customers. LRCX has a P/B ratio of 11.8, with any figure close to or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Lam Research's quick ratio is 1.77. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
At Market Inference, we will keep monitoring Lam Research to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.
