Applied Materials Ready To Bounce On Book To Bill Improvement

May.20.12 | About: Applied Materials, (AMAT)

On May 17, 2012, Applied Materials (NASDAQ:AMAT), the global leader in providing manufacturing solutions for the semiconductor, display and solar industries, reported results for its second quarter of fiscal 2012 (ended April 29, 2012) which beat estimates, but nonetheless its stock has remained depressed. Considering its fundamentals parameters, it seems that the stock is undervalued. In contrast to its historical character of a growth stock, AMAT might now be considered a very good value stock: low price to earnings, low price to book value and low price to sell, as well as low debt and a generous dividend. As a matter of fact, its price to book and price to sales are now the lowest in this century. Applied's valuation is attractive also when comparing it to its peers, as shown in the table below.

PEER GROUP: Semiconductor Equipment

AMAT

KLAC

LRCX

NVLS

Closing Price (May 18, 2012)

10.36

45.56

37.57

42.12

Market Cap ($Billion)

13.13

7.62

4.52

2.97

P/E

10.23

10.31

16.62

15.69

Forward P/E

8.85

9.41

10.73

13.50

PEG Ratio (5 year expected)

1.36

0.93

1.75

1.49

Price/Sales

1.39

2.44

1.70

2.36

Price/Book (mrq)

1.55

2.45

1.73

3.72

Price/Free Cash Flow

8.62

11.13

9.12

10.61

Enterprise Value/EBITDA

6.67

5.28

6.12

9.88

Total Debt/Equity (mrq)

22.4%

23.6

29.1

100.6

Forward Annual Dividend Yield

3.40%

3.00%

0.00%

0.00%

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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 book to bill greater than one means that new orders exceed sells. Applied's generated orders were $2.77 billion in the last quarter and net sales were $2.54 billion, which gives a book to bill ratio of 1.09. This greater than one ratio comes after three quarters of a book to bill ratio of less than one, a fact that indicates an improving horizon for the company.

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Taking in account its fundamental valuation and the increasing demand for flash memory devices such as tablets and smartphones toward the second half of the year, I think that Applied Materials is quite a safe bet.

Disclosure: I am long AMAT.