Applied Materials (AMAT), the semiconductor capital equipment manufacturer reports after the bell on Wednesday, February 13th, 2013. Analyst consensus is looking for $0.03 in earnings per share (EPS) on $1.54 billion in revenue for a decline in EPS of 83% on a 30% drop in revenues.
AMAT was about 10% in 2012, when factoring in the 3% dividend, after falling 25% in 2011. There have been very few positives for AMAT the last few years, with the possible exception of their cash-flow, but that could be in the earlier stages of changing.
AMAT's biggest problem is the same as that of Intel (INTC) and Corning (GLW): capex is a substantial percentage of revenues at 18% - 20% of 4-quarter trailing revenues. AMAT today is also a substantially different company than the AMAT we knew in the 1990's, which was driven by the silicon and semiconductor cycle. The Silicon Systems Group (SSG) is 51% of AMAT's total revenues today, according the fiscal 4th quarter, 2012:
- SSG - 51% of total revenue
- AGS - 39%
- Display - 6%
- Enviro - 4%
The move into solar seemed smart at the time but the European solar market and the subsidy's offered, suffered along with the EU debt crisis, and the purse tightening. SSG revenues fell 44% in the 4th quarter as orders fell 36%. Management used the November earnings report to lower 2013 guidance as well.
However, the tide could be changing particularly as it comes to the U.S., Western Europe and Southeast Asia China. By region, U.S. revenues account for 23% of AMAT's total revenues and orders while China and Asia-Pacific represent between 8% - 25% of both revenues and orders over the last two years. Both U.S. and China / Asia-Pacific order growth has improved for 4 straight quarters as of October, 2012.
The most interesting aspect to AMAT's valuation story is the compelling cash-flow metrics: as of the October '12 quarter, AMAT was trading at 7(x) price to 4-quarter trailing cash flow and 7(x) price to 4-quarter trailing free-cash flow, with a 13% free-cash-flow "yield".
The dividend at 3.5% is quite nice too. Already year-to-date AMAT is up close to 20%.
We'd buy a pullback into the $12 area as the forward earnings and revenue estimates continue to be under pressure. We don't want to hear on the conference call on Wednesday night that guidance is being lowered (again). A potential turn in Japan, China and Europe and if North America continues to grow at a moderate pace bodes well for AMAT.
Our internal model values AMAT near $13 per share using the current forward estimate of $0.73 EPS. Peak EPS (using forward estimates back in 2010) were $1.21 and $1.58 per share, so if AMAT is afforded a 15(x) multiple on what might be peak earnings post the 2008 recession, AMAT would be fully valued at $22 - $23 per share. Morningstar puts AMAT's fair value at $17. If we split the difference, AMAT starts getting fully valued near $20 per share.
AMAT was our worst sale in late 2012, near $10.25 after the last November earnings report. Wish I had that one back. We'd buy the $12 price area again if we got the chance.