Investors who have been looking for a turnaround in Applied Material's (AMAT) stock got it from the company's Q4 report. Applied Material reported an adjusted profit of $117 million or 18 cent per share compared with a profit of $506 million or $38 38 cents per share a year ago- exceeding analysts 'estimates by 3 cents. Revenue came in at $2.19 billion, beating analysts' estimates of $1.97 billion. The company reported strong demand in most of its core business. This is a major change from previous quarters, so the stock jumped in after hours trading.
Does it mean that the stock is a buy? Yes, for five good reasons:
The company has fully recovered from a temporary setback in its Japanese operations in the aftermath of the March 11 earthquake.
Applied Materials is well-positioned to take advantage of the improving industry fundamentals. The company operates in four segments:
The Silicon Systems group develops equipment for the chip fabrication process and accounted for 55% of FY 2011 sales.
Global Services provides services to improve the efficiency of semiconductor factories and accounted for 20% of FY 2011 sales.
The Display segment develops equipment used to produce flat panel displays and accounted for 9% of FY 2011 sales.
Finally, Energy and Environmental services produces equipment used in the production of solar cells and energy efficient glass and accounted for 16% of FY 2010 sales.
- Solid fundamentals, hefty profit margins, high quarterly growth, and plenty of barriers to entry to its market. Applied Materials has a solid balance sheet with nearly $2.6 billion in cash and only $200 million in long-term debt. On a valuation basis, the stock is relatively cheap, with a low P/E ratio. Based on its projected ROE and retention rate, the long-term sustainable rate of growth in earnings (retention rate times ROE) should be in the range of 12 to 15%. This implies a PEG ratio (based on the current forward P/E ratio) of less than one, indicating a favorable investment opportunity.
Company | Forward PE* | Operating profit margins | Quarterly profit growth (yoy) |
Applied Materials | 8.60 | 24.31% | 85.20% |
KLA-Tencor Corp (KLAC) | 8.29 | 36.63 | 116.70 |
Lam Research(LRCX) | 9.72 | 25.20 | -10 |
*October 2012
- A demonstrated record of innovations - the company has been producing materials for fast growing industries like smartphones and solar panels.
A 2.5% dividend- unusually high for technology companies. Not that bad for a high-technology company in a low interest environment.
The bottom line: Applied Materials is a long-term buy.
Disclosure: I am long AMAT.
