Analysts' Choice: Applied Materials Positioned To Grow

11/28/2016


  Recent Price
$32
  Dividend
$0.40
  Yield
1.3%
  P/E Ratio
18
  Shares (millions)
1,093
  Long-Term Debt As % Of Capital
33%
  52-Week Price Range
$31.80 - $15.44

Applied Materials ($32; AMAT) shares have surged 70% so far in 2016, easily outpacing the 8% advance for the S&P 500 Index and an 13% gain for the Technology Sector Index. The rally has pushed Applied Materials to its highest level since August 2000. After such an outstanding run, where does the stock go from here? We say up, for the reasons headlined below. Applied Materials, the largest U.S. maker of semiconductor-equipment, is a Buy and a Long-Term Buy.

Strong results and guidance

For the October quarter, Applied Materials reported per-share earnings of $0.66 excluding special items, up from $0.29 a year earlier. The consensus stood at $0.65. Revenue surged 39%, cash from operations grew 69%, and free cash flow doubled.

The report was not entirely positive. New orders rose 25% to $3.03 billion but fell short of analyst expectations for $3.21 billion. Profit margins also contracted. However, the company's midpoints for January-quarter guidance ranges call for earnings per share of $0.66, up from $0.26 in the year-ago quarter, on revenue of $3.27 billion, up 45%. At the time of the announcement, analysts anticipated per-share profits of $0.58 and revenue of $3.12 billion.

Improving environment

Applied Materials expects industrywide spending on wafer-fabrication equipment to rise 1% to 4% in 2017, followed by additional growth in 2018. The company continues to gain clout with semiconductor customers.

Competing in nearly every key segment within the industry, its share of the wafer-fabrication equipment market stands at 22%, up from 18% in 2012.

Rising capital returns

The company has used stock buybacks to slash its share count 12% in the last 18 months, making the overwhelming majority of repurchases when shares traded below $20. The stock pays a quarterly per-share dividend of $0.10 and yields 1.3%, though the payout has not been raised since 2013.   

Management expects to generate healthy free cash flow over the next few years, funding more capital returns to shareholders. It is currently chewing through a fresh $2 billion share-repurchase plan, and CFO Bob Halliday suggested in November the company would consider raising the dividend.

Decent valuation

The stock earns a decent Value score of 55, though it looks even more attractive compared to the other 15 stocks in the S&P 1500 semiconductor-equipment industry, which average a score of 45. At 18 times trailing earnings, Applied Materials trades 17% below its industry median and 19% below its own five-year median of 22.

Applied Materials is projected to grow earnings per share 30% to $2.28 in fiscal 2017 ending October. If Applied Materials meets the current consensus and its trailing P/E ratio rises to 19, the shares will approach $43 in the coming year.

An annual report for Applied Materials Inc. is available at 3050 Bowers Ave., P.O. Box 58039, Santa Clara, CA 95052; (408) 727-5555; www.appliedmaterials.com.

APPLIED MATERIALS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Oct '16
0.66
vs.
0.29
39%
31.07
-
25.68
22 - 18
Jul '16
0.50
vs.
0.33
13%
27.11
-
19.46
22 - 16
Apr '16
0.37
vs.
0.29
0%
21.67
-
15.44
19 - 13
Jan '16
0.26
vs.
0.27
-4%
19.41
-
15.85
16 - 13
           
Year
(Oct.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
10.83
1.75
0.40
31.07
-
15.44
18 - 9
2015
9.66
1.19
0.40
25.74
-
14.25
22 - 12
2014
9.07
1.07
0.40
23.46
-
16.40
22 - 15
2013
7.51
0.59
0.39
18.18
-
9.95
31 - 17
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
96
55
83
68
77
84

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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