When you dig deep into the technology of every phone / laptop or tv, there's a big chance you'll find AMAT.
Is it worth the digging?
Key Stats for Applied Materials, Inc.
| Ticker | AMAT |
|---|---|
| Sector | Semiconductor Machinery Manufacturing |
| Latest price | $41.31 |
| Value | $44,393M |
| Daily vol | $456M |
| Date | 03 July 2017 |
| Links | SEC Filings, http://ift.tt/nM3vwh |
1. Looking at the chips
Applied Materials provides manufacturing equipment, services and software to the semiconductor, display and related industries. So it's an interesting play of the technology business. They aren't the chip maker, or the person who sells the chips inside the phones. They are the folks that make the equipment that makes the chips. Tangential eh?
They've 4 divisions, but the Semis biz is the key, both it terms of sell kit and supporting clients.
- Semiconductor Systems, 60% of sales, where they sell their kit
- Global Services, just over 20% of sales, where they are supporting and upselling to the existing clients
- Display and Adjacent Markets, just under 20%, which is their LCD screen equipment, etc
- the Corporate and Other segment, which includes solar cells etc, though this is less than 2% of sales.
Of course, you won't be surprised that 85% of sales are in Asia. and just 10% in the US, and the rest in Europe. With TSMC in Taiwan making up over 15% of sales. Samsung, Micron and Intel over 10% each. Imagine, their top 4 clients are 51% of sales.
Looking at revenues and profits, it's been beautiful the last three years! And looking at the forecasts for the year to October 2017, it's expected to get wildly better.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E |
|---|---|---|---|---|---|---|
| Revenue | $8.7bn | $7.5bn | $9.1bn | $9.7bn | $10.8bn | $14.2bn |
| EPS | $0.09 | $0.21 | $0.87 | $1.12 | $1.54 | $3.08 |
| DPS | $0.35 | $0.39 | $0.40 | $0.40 | $0.40 | $0.41 |
Though for some strange reason, this isn't filtering through to an increased dividends :( Well, I suppose we shouldn't complain, they did $2bn of buybacks, versus $450m of dividend payments. Though with all that cash-flow pumping, it's hardly a surprise that they are in a net cash position.
2. Better Picks 'n' Shovels
When it comes to the peers, everyone's got a specialty, an edge. But clearly AMAT's at the more commodity end of the business model. And if we look at their big clients, we can see they aren't more profitable than their customers.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Applied Materials, Inc. | $12,942M | 26% | 36% |
| Picks 'n' Shovels | |||
| ASML Holding NV (ADR) | $8,459M | 35% | 15% |
| Lam Research Corporation | $7,215M | 26% | 23% |
| KLA-Tencor Corp | $3,461M | 39% | 116% |
| Qorvo Inc | $3,033M | 27% | 0% |
| Teradyne, Inc. | $1,779M | 25% | 0% |
| Clients | |||
| Taiwan Semiconductor Mfg. Co. Ltd. (ADR) | $32,165M | 63% | 26% |
| Micron Technology, Inc. | $17,401M | 40% | 18% |
| Intel Corporation | $60,481M | 39% | 18% |
And how does this filter thro' to valuation? It doesn't. Margins seem to be irrelevant to the valuation. Growth rates seem to be irrelevant. Dividends too!
Though, there's ASML, which is in an oligopoly position (lithography a story in its own right), and there's the rest.
| Valuation | Size | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| AMAT.O | $44,393M | 13x | 26% | 1% | 8% |
| Picks 'n' Shovels | |||||
| ASML.O | $57,243M | 30x | 21% | 1% | 5% |
| LRCX.O | $22,814M | 14x | 24% | 1% | 8% |
| KLAC.O | $14,345M | 16x | 12% | 2% | 9% |
| QRVO.O | $8,053M | 11x | 15% | 0% | 8% |
| TER | $5,974M | 16x | 8% | 1% | 2% |
| Clients | |||||
| TSM | $177,968M | 16x | 15% | 4% | 14% |
| MU.O | $33,034M | 6x | N/A | 0% | 18% |
| INTC.O | $158,882M | 12x | 8% | 3% | 15% |
3. Love boring?
The professionals on Wall Street have a $50 target for $AMAT which is a 20% upside. So no wonder their recommendation to clients is Buy. And the stock trading at 13x is at the lower end of it's 12 to 18x forecast earnings range. And they typically beat earnings by a cent or two every quarter!
Though as bullish as Wall Street is, they've not drunk the Kool-Aid as management have:
Today, many new demand drivers are emerging that layer on top of traditional computing and mobility, technologies like the Internet of Things, big data and artificial intelligence are transforming industries, including transportation, health care, entertainment and manufacturing. The way these industries create value is increasingly dependent on capturing, transmitting, understanding and storing data. In turn, this means they are more and more reliant on advanced semiconductors.
4. Rising tide?
Management talks about the industry's growth being sustainable and the position of AMAT being sustainable. So a rising tide is lifting all boats? Especially AMAT? Sitting on a 3 bagger in 2 years, "long-term shareholders" gotta be happy, but do I jump now in now?
All the fundamentals look good, the valuation looks reasonable, so it's hard to argue with the bulls! Sure, you can worry about China every now and again, or spot a weak quarter, but does that stop the rising tide? Doubt it.
But if you do buy, watch the industry like a seasoned mariner. The tide always turns. The Semi business gets nasty quickly, sales can plummet, plunging the leaders into lose. And maybe that explains the low single digit valuations, and low dividend payout ratios... anyone with more than a 5 year memory, has seen Semi ships flounder before.
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have a position in LRCX, but not any of the other stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted July 03, 2017 at 04:27PM by shane_stockflare http://ift.tt/2uDBfgD
