Analysts' Choice: Go With The Veteran — Applied Materials

5/8/2017


  Recent Price
$42
  Dividend
$0.40
  Yield
1.0%
  P/E Ratio
19
  Shares (millions)
1,089
  Long-Term Debt as % of Capital
29%
  52-Week Price Range
$41.82 - $19.46

Applied Materials ($42; AMAT) was around for the birth of the modern semiconductor, creating the first commercial system for depositing silicon dioxide on a chip in 1967. In the ensuing years, Applied Materials was an early mover in the market for equipment that made LED screens, and a pioneer in the use of chemical vapor, and later plasma vapor, to make semiconductors.

Of course, you won't make money buying yesterday's leader — unless it's also today's leader. In the last year, Applied Materials spent more than $1.5 billion (13% of revenue) on research & development to help it keep current. Today, the company says its products provide "atomic-level precision" for etching three-dimensional semiconductors.

Applied Materials earns a Quadrix Overall score of 97. The stock, which yields 1.0%, is a Buy and a Long-Term Buy.

Major player

As the world's biggest semiconductor-equipment maker, Applied Materials owns a piece of just about every pie. In recent quarters, the company has released new products to deal with industry trends such as the rise of 3-D NAND memory, increasing demand for OLED technology (light-emitting diodes that use an organic film) in mobile devices, and shrinking chip sizes (some as small as 10 nanometers). A nanometer is a billionth of a meter. Applied Materials has found big opportunity in small. 

In the January quarter, Applied Materials posted record growth in orders, with bookings outpacing billings by 28% as the market leader continued to grab share. Years of investment in streamlining manufacturing has paid off in the form of rising profit margins (operating margin of 25.4% in the last year, versus 18.6% three years ago), which gives the company plenty of bottom-line leverage during this period of strong revenue growth.

While the possibility of a cyclical slowdown always haunts this industry, the paradigm seems to be shifting. If revenue rises in fiscal 2018, as both the company and analysts expect, it will mark Applied Materials' fifth straight year of growth, a streak not seen since the early 1990s. The explosion of semiconductor manufacturing worldwide in recent years has reduced customer concentration for equipment makers. And as more and more non-consumer-driven industries rely on semiconductors for automation, demand has become more sustainable and probably less cyclical.

Staying on top

Fifty years of history suggests Applied Materials can remain at the front edge of technological advancements, which gives us confidence in the company's future growth. Sales rose 24%, per-share profits 75%, and operating cash flow 122% in the 12 months ended January. Analysts expect 52% growth in per-share profit this year, followed by 6% in fiscal 2018 ending October.

In the last seven quarters, Applied Materials spent $7.8 billion on stock buybacks, reducing its share count 12%. Management expects continued buybacks going forward. An annual report for Applied Materials Inc. is available at 3050 Bowers Ave., 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
Jan '17
0.67
vs.
0.26
45%
35.15
-
28.02
20 - 16
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
0.34
vs.
0.29
0%
21.67
-
15.44
19 - 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
25.71
-
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
97
99
63
92
74
NA
91

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


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