I'm very much a contrarian; whenever I see a stock that's been battered down, I tend to go in and do some research to see if after the decline the company represents a good value. I've been intrigued by Applied Materials (NASDAQ:AMAT), especially since it provides a lot of the equipment that is the backbone of semiconductor manufacturing. Now that it is near a 52-week low, I'm examining it to see if it's worth owning at these levels.
Let's first examine the financials. The company trades at 10.33 times the trailing twelve months' earnings and 9.02 times forward earnings. The balance sheet looks okay, with a net $220M cash position. The yellow flags here are the significantly negative year-on-year quarterly earnings growth of -40.9% paired with the -11.2% quarterly revenue growth. The majority of the pain here does appear to stem from the company's solar and display businesses. However, these numbers don't give the whole picture; to see it, we turn to the semiconductor manufacturing equipment side of things, especially as it is Applied's largest and most profitable division.
I won't spend too much time on technical jargon, but I will say that in order for companies like Intel (NASDAQ:INTC) and Taiwan Semiconductor Manufacturing Corporation (NYSE:TSM) to be able to build their fabrication plants and develop the latest process nodes to bring us smaller and more power efficient chips, they need significant amounts of very specialized equipment from Applied Materials (and others). Given that we've seen Samsung, Intel, and Taiwan Semiconductor all up their capital expenditure for the year, it's pretty safe to assume that a lot of that business is going to Applied Materials.
Will such spending continue on semiconductor manufacturing equipment? The market for semiconductor devices is growing rapidly, and it seems that demand currently exceeds supply when it comes to TSMC's 28nm process. Expanding capacity to meet the needs of all of the companies clamoring to get some 28nm manufacturing capacity, including NVIDIA (NASDAQ:NVDA), Qualcomm (NASDAQ:QCOM), and Advanced Micro Devices (NYSE:AMD) will require the foundries to buy more equipment. Even United Microelectronics Corporation (NYSE:UMC) and Global Foundries have made their intentions to meet a good portion of the demand for 28nm and beyond. This will require significant investment in semiconductor manufacturing equipment, which is positive for Applied Materials going forward.
Finally, I like to mention that AMAT pays a healthy $0.36/share dividend, which at current prices comes out to about a 3.44% yield. Management seems keen on both share buybacks and dividend increases, so this should lead to increased shareholder value over time. The stock also is near 52-week and two-year lows, so I don't expect too much downside on the share price here. I also, however, don't expect the stock to test its 52-week high of $13.94 in the near term due to both macro-economic worries and the company's solar and display divisions holding it back. Long term, though, the stock should perform well, especially with the dividend in place to make the wait easier. Buying Applied Materials now should be done with the expectation of a fairly long-term wait.
Disclosure: I am long NVDA.