With Applied Materials (AMAT) still way below its pre-credit crisis high of over $22 a share in 2007, I decided to take a closer look at the company to see if it is an attractive opportunity.
Valuation: Applied Materials' trailing 5 year valuation metrics suggest that the stock is undervalued as all three of the metrics are in the lower end of their respective 5 year ranges. Applied Materials' current P/B ratio is 1.87 and it has traded in a range of 1.7 to 4.1 over the past 5 years. Applied Materials' current P/S ratio is 1.56 and it has traded in a range of 1.5 to 3.3 over the past 5 years. Applied Materials' current P/E ratio is 8.72 and it has traded in a range of 8.4 to 17.6 over the past 5 years.
Price Target: The consensus price target for the analysts who follow Applied Materials is $13. That is upside of 6% from today's stock price of $12.64 and suggests that the stock is overvalued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Forward Valuation: Applied Materials is currently trading at about $13 a share with analysts expecting EPS of $1.13 next year, an earnings increase of 49% y/y, for a forward P/E ratio of 11.2. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. KLA-Tencor (KLAC) is currently trading at about $52 a share with analysts expecting EPS of $4.52 next year, an earnings increase of 8% y/y, for a forward P/E ratio of 11.4.
Lam Research (LRCX) is currently trading at about $45 a share with analysts expecting EPS of $3.71 next year, an earnings increase of 73% y/y, for a forward P/E ratio of 12. ASML Holding (ASML) is currently trading at about $44 a share with analysts expecting EPS of $4.18 next year, an earnings increase of 23% y/y, for a forward P/E ratio of 10.6. The mean forward P/E of Applied Materials' competitors is 11.3 which suggests that Applied Materials is fairly valued relative to its publically traded competitors.
Earnings Estimates: Applied Materials has beat EPS estimates every time in the past 4 quarters. The company's EPS figures have come in between 1 cent and 3 cents from consensus estimates or about 2.7% to 10.5% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.
Top Stock Holders: The top mutual fund that owns Applied Materials is Fidelity VIP Mid Cap Inv, which owns 14 million shares or 1.07% of the shares outstanding. The top two institutions that own Applied Materials are Harris Associates L.P., which owns 65.1 million shares or 4.94% of the shares outstanding, and Vanguard Group, Inc., which owns 52.7 million shares or 4.03% of the shares outstanding.
Price Action: Applied Materials is down -22.5% over the past year, underperforming the S&P 500, which is up 3.9%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $11.41 and above its 200 day moving average, which sits at $11.42.
Conclusion: The valuation metrics have different suggestions as the trailing valuation metrics suggest that the stock is undervalued while analysts and the forward valuation metric suggest that the stock is fairly valued. Considering that analysts are very short time sighted and the forward valuation metric is relative to other semiconductor companies, it seems like there is opportunity here.
As a semiconductors company, the stock should stand to benefit as the economy continues to improve. The stock also pays a nice 2.6% dividend yield that should provide income as an investor awaits price appreciation.