Applied Materials: A Long-Term Buying Opportunity

| About: Applied Materials, (AMAT)

I find Applied Materials, Inc. (NASDAQ:AMAT) stock as a good combination of value and growth dividend stock. Although the stock price has risen 65.7% since the beginning of 2013, it is still an excellent buy right now. This is compared to the 28.9% rise of the S&P 500 index and the 40.6% rise of the Nasdaq Composite Index during the same period. In this article, I will explain why, in my opinion, Applied Materials stock is a remarkably promising long term investment.

The Company

Applied Materials is the global leader in manufacturing solutions for the semiconductor, display and solar industries. Incorporated in 1967, Applied, a Delaware corporation, provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic and related industries. Applied's customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal and other displays, solar PV cells and modules, and other electronic devices.


Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions.

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Source: Q4 2013 Quarterly Earnings Presentation

The Industry

Semiconductor and semiconductor equipment manufacturers have historically been highly cyclical, with periods of strong growth and high margins, which have caused companies to raise capital investment, and in effect have caused excess supply followed by periods of weakness. The economic data and companies' comments are all saying essentially the same thing, which is that the semiconductor equipment industry has already passed through the bottom of the current cycle. New internet applications will extend the compute environment to every day devices like smart television, wearable, cars, light bulbs and more. This development will increase the demand for semiconductor test equipment.

Book-to-Bill Ratio

One very important parameter when analyzing a semiconductor company is the book-to-bill ratio, which is the ratio between new orders to actual sells. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. On January 23, 2014 the SEMI.ORG announced that the North American semiconductor equipment industry posted December 2013 book-to-bill ratio of 1.02. The three-month average of worldwide bookings in December 2013 was $1.38 billion. The bookings figure is 11.1 percent higher than the final November 2013 level of $1.24 billion, and is 48.3 percent higher than the December 2012 order level of $927.4 million. The three-month average of worldwide billings in December 2013 was $1.35 billion. The billings figure is 20.8 percent higher than the final November 2013 level of $1.11 billion, and is 33.8 percent higher than the December 2012 billings level of $1.0 billion.

On that occasion, Denny McGuirk, president and CEO of SEMI said:

Through the final quarter of 2013, both bookings and billings continually improved. The December three-month average bookings were at the highest level since June 2012 - a positive sign for the 2014 spending outlook.

The table below presents the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since the beginning of 2012.

Source: SEMI.ORG

The charts below present the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since 1991.

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Source: SEMI.ORG

Valuation Metrics

The table below presents the valuation metrics of Applied Materials. The data were taken from Yahoo Finance.

Applied's valuation metrics are quite good; the company has a very low debt, the forward P/E is low at 14.04, and the average annual earnings growth estimates for the next five years is at 9%. The PEG ratio, using next financial year forward P/E of 14.04 and the annual earnings growth estimates of 9%, is not too high at 1.56 (forward P/E divided by growth).

Many analysts of the semiconductors industry give a high importance to the price-to-sales ratio, and consider it a better indicator than the P/E ratio for companies in this industry. Comparing the current price-to-sales ratio to its historical values can give a fair idea if the stock is cheap or too expensive right now. In the case of Applied Materials, the actual ratio is not historically too high as shown in the chart below (the small difference in value between the chart and the table is due to delayed updating of the chart).


Applied has been paying uninterrupted dividends since 2007. The forward annual dividend yield is at 2.10%, and the payout ratio is at 103%. The annual rate of dividend growth over the past three years was quite high at 12.79% and over the past five years was also high at 10.73%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and AMAT's performance has been impressive in this respect.

Applied's dividend is paid every quarter, as shown in the table and the chart below.

Latest Quarter Results

On February 12, 2014, Applied Materials reported its first-quarter fiscal 2014 financial results, which beat EPS expectations by $0.01, beat on revenues, and forecasted second-quarter's revenue and profit slightly above consensus. Applied generated orders of $2.29 billion, up 9 percent from the prior quarter led by demand for Silicon Systems Group products. Net sales were $2.19 billion, up 10 percent sequentially. Non-GAAP adjusted gross margin increased to 42.5 percent while non-GAAP adjusted operating income grew 18 percent sequentially to $380 million or 17.4 percent of net sales. Non-GAAP adjusted net income grew 22 percent sequentially to $279 million or 23 cents per diluted share. In the report, Gary Dickerson, Chief Executive Officer said:

In our first fiscal quarter, Applied Materials delivered earnings near the high end of our guidance range, while demonstrating momentum in revenue, orders and market share. This performance reflects healthy investment by our semiconductor and display customers and major technology trends that are playing to our strengths in precision materials engineering.

Backlog grew 3 percent in the quarter to $2.44 billion including negative adjustments of $32 million, primarily related to currency adjustments. Backlog composition by segment was: SSG 56 percent; AGS 27 percent; Display 12 percent; and EES 5 percent.

For the second quarter of fiscal 2014, Applied expects net sales to be up 3 percent to 10 percent from the previous quarter. Non-GAAP adjusted diluted EPS is expected to be in the range of 25 cents to 29 cents.

Quarterly Results

The charts below present the Applied Materials' net revenues, net orders and the book-to-bill ratio for each quarter since 2011.

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Source: Applied's Quarterly Reports

Applied's book-to-bill in the last five quarters was higher than one, this indicates growing demand for Applied's products.

Technical Analysis

Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.

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The AMAT stock price is 9.78% above its 20-day simple moving average, 10.13% above its 50-day simple moving average and 16.07% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at -0.025, and ascending, which is bullish (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 69.79 approaching overbought conditions.

Analyst Opinion

Analyst opinion is divided, but most analysts recommend the stock. Among the twenty one analysts covering the stock, four rate it as a strong buy, seven rate it as a buy, seven rate it as a hold and three analysts rate it as an underperform.

Major Development

On September 24, 2013, Applied Materials announced its intent to acquire the world third largest semiconductor and flat panel display equipment manufacturer Tokyo Electron in an all-stock transaction. Tokyo Electron shareholders will receive 3.25 shares of the new company for every Tokyo Electron share held. Applied shareholders will receive one share of the new company for every Applied Materials share held. After the close, Applied Materials shareholders will own 68% of the new company and Tokyo Electron shareholders 32%. This deal, which has been unanimously approved by the Boards of Directors of both companies, is expected to close in mid to second half of 2014. The closing of the transaction is subject to customary conditions, including approval by Applied Materials' and Tokyo Electron's shareholders and review by regulators. The new company intends to commence a $3.0 billion stock repurchase program targeted to be executed within 12 months following the close of the transaction.

My Take

In my opinion, Applied will outperform the worldwide wafer fab equipment in 2014. According to SEMI.ORG, in its publication of December 03, 2013, worldwide sales of new semiconductor manufacturing equipment will increase in 2014 by 23.2% to $39.46 billion. System-on-chip (SOC) orders should trend up in 2014 as semiconductor manufacturers and test providers resume equipment purchases following a period of digestion last year. Applied sales represent nearly one quarter of total semi equipment sales, and it should be the first to benefit from the strong growth in semi equipment purchases.

In think that Applied's decision to acquire the world third largest semi equipment manufacturer Tokyo Electron is a smart move. The deal is expected to achieve $250 million in annualized run-rate operating synergies by the end of the first full fiscal year and $500 million in run-rate operating synergies realized in the third full fiscal year. In addition, the new company expects to realize meaningful savings as a result of the new corporate structure. The merger with Tokyo Electron will further improve innovation on the materials side, thereby helping sales and providing the company a competitive advantage.

Applied should also benefit from the current industry trends, the mobility trend is driving a new phase of industry growth and introducing dramatic and fundamental technology changes in the way devices are made. According to Mr. Dickerson Applied's CEO, smartphones and tablets now generate more semiconductor and display revenue than all other electronic categories combined. Applied's precision materials engineering technology is enabling key inflections in the mobility war by providing customer solutions that increase yield while enabling semiconductors that enhance device performance.


According to Applied, the global semiconductor, flat panel display, and solar industries, historically have been cyclical due to sudden changes in customers' requirements for new manufacturing capacity and advanced technology, which depend in part on customers' capacity utilization, production volumes, access to affordable capital, end-use demand, consumer buying patterns, and inventory levels relative to demand, as well as the rate of technology transitions and general economic conditions. These changes have affected the timing and amounts of customers' purchases and investments in technology, and continue to affect Applied's orders, net sales, operating expenses and net income.

There is a possibility that the Applied Materials - Tokyo Electron deal might raise antitrust concerns in multiple jurisdictions, due to the size of the combined company. In case that the deal would not be approved by regulators, it might cause a temporary decline in Applied's stock price.


As the leading global supplier of semiconductor equipment, Applied will benefit from the rebound in semiconductor manufacturing equipment spending in 2014. Applied has a very strong product line, and management has stepped up investments in preparation for the on-going transitions to larger wafer sizes and smaller process nodes. Applied management expects significant share gains through 2014. In addition, The Applied Materials - Tokyo Electron deal will provide the company a competitive advantage. Applied has a strong balance sheet fair valuation metrics and robust earnings growth prospects. Furthermore, the rich dividend represents a nice income.

All these factors bring me to the conclusion that AMAT stock is a smart long-term investment.

Disclosure: I am long AMAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.