# Lam Research Corp. (NASDAQ:LRCX)

## Present Value of Free Cash Flow to the Firm (FCFF)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Lam Research Corp., free cash flow to the firm (FCFF) forecast

US\$ in thousands, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 14.65%
01 FCFF0 3,421,423
1 FCFF1 4,008,332 = 3,421,423 × (1 + 17.15%) 3,496,222
2 FCFF2 4,628,429 = 4,008,332 × (1 + 15.47%) 3,521,309
3 FCFF3 5,266,523 = 4,628,429 × (1 + 13.79%) 3,494,861
4 FCFF4 5,903,913 = 5,266,523 × (1 + 12.10%) 3,417,284
5 FCFF5 6,519,035 = 5,903,913 × (1 + 10.42%) 3,291,242
5 Terminal value (TV5) 170,226,058 = 6,519,035 × (1 + 10.42%) ÷ (14.65%10.42%) 85,941,412
Intrinsic value of Lam Research Corp.’s capital 103,162,330
Less: Debt outstanding (fair value) 5,600,833
Intrinsic value of Lam Research Corp.’s common stock 97,561,497

Intrinsic value of Lam Research Corp.’s common stock (per share) \$687.28
Current share price \$589.91

Based on: 10-K (filing date: 2021-08-17).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Weighted Average Cost of Capital (WACC)

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 83,739,896 0.94 15.41%
Debt outstanding (fair value) 5,600,833 0.06 3.27% = 3.57% × (1 – 8.41%)

Based on: 10-K (filing date: 2021-08-17).

1 US\$ in thousands

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 141,953,681 × \$589.91
= \$83,739,895,958.71

Debt outstanding (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (10.58% + 12.55% + 7.82% + 28.27% + 6.29% + 4.80%) ÷ 6
= 8.41%

WACC = 14.65%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Lam Research Corp., PRAT model

Average Jun 27, 2021 Jun 28, 2020 Jun 30, 2019 Jun 24, 2018 Jun 25, 2017 Jun 26, 2016
Selected Financial Data (US\$ in thousands)
Interest expense 208,597  177,440  117,263  97,387  117,734  134,773
Net income 3,908,458  2,251,753  2,191,430  2,380,681  1,697,763  914,049

Effective income tax rate (EITR)1 10.58% 12.55% 7.82% 28.27% 6.29% 4.80%

Interest expense, after tax2 186,527  155,171  108,093  69,856  110,329  128,304
Add: Cash dividends declared 745,294  665,099  662,844  409,243  268,181  190,795
Interest expense (after tax) and dividends 931,821  820,270  770,937  479,099  378,510  319,099

EBIT(1 – EITR)3 4,094,985  2,406,924  2,299,523  2,450,537  1,808,092  1,042,353

Current portion of long-term debt and finance lease obligations 11,349  839,877  667,131  610,030  908,439  949,494
Long-term debt and finance lease obligations, less current portion 4,990,333  4,970,848  3,822,768  1,806,562  1,784,974  3,383,581
Stockholders’ equity 6,027,188  5,172,494  4,673,865  6,501,851  6,817,451  5,894,517
Total capital 11,028,870  10,983,219  9,163,764  8,918,443  9,510,864  10,227,592
Financial Ratios
Retention rate (RR)4 0.77 0.66 0.66 0.80 0.79 0.69
Return on invested capital (ROIC)5 37.13% 21.91% 25.09% 27.48% 19.01% 10.19%
Averages
RR 0.73
ROIC 23.47%

FCFF growth rate (g)6 17.15%

Based on: 10-K (filing date: 2021-08-17), 10-K (filing date: 2020-08-18), 10-K (filing date: 2019-08-20), 10-K (filing date: 2018-08-14), 10-K (filing date: 2017-08-15), 10-K (filing date: 2016-08-17).

2021 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 208,597 × (1 – 10.58%)
= 186,527

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 3,908,458 + 186,527
= 4,094,985

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,094,985931,821] ÷ 4,094,985
= 0.77

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,094,985 ÷ 11,028,870
= 37.13%

6 g = RR × ROIC
= 0.73 × 23.47%
= 17.15%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (89,340,729 × 14.65%3,421,423) ÷ (89,340,729 + 3,421,423)
= 10.42%

where:

Total capital, fair value0 = current fair value of Lam Research Corp.’s debt and equity (US\$ in thousands)
FCFF0 = the last year Lam Research Corp.’s free cash flow to the firm (US\$ in thousands)
WACC = weighted average cost of Lam Research Corp.’s capital

#### FCFF growth rate (g) forecast

Lam Research Corp., H-model

Year Value gt
1 g1 17.15%
2 g2 15.47%
3 g3 13.79%
4 g4 12.10%
5 and thereafter g5 10.42%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 17.15% + (10.42%17.15%) × (2 – 1) ÷ (5 – 1)
= 15.47%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 17.15% + (10.42%17.15%) × (3 – 1) ÷ (5 – 1)
= 13.79%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 17.15% + (10.42%17.15%) × (4 – 1) ÷ (5 – 1)
= 12.10%