Applied Materials Shows Green Can Be Profitable

Applied Materials (AMAT) announced a $1.9 billion sales contract for their solar technology division, making it the largest sale in Applied’s history. Applied has long been a major player in the chip manufacturing equipment industry but has diversified its focus in the last few years. AMAT has developed technology used in flat panel displays such as computer monitors and HDTVs.

However, this pales in comparison to the splash that AMAT has made in the solar energy industry, and it began June of 2007 with the acquisition of HCT Shaping Systems SA of Switzerland for $475 million. HCT pioneered precision wafering systems particularly useful in manufacturing crystalline silicon (c-Si) substrates.

This $1.9 billion contract demonstrates that AMAT’s gamble to make solar energy competitive seems to be paying off. The contract will stipulate that AMAT provide equipment, installation, and warranty for multiple factories that produce solar panels. This is clearly a huge contract, but it especially enormous considering revenues for AMAT’s solar panel business line were just $31 million for first quarter 2007, and grew substantially to $260 million for the first quarter 2008. As revenues have grown so too have operating losses, which over the same period grew from $15 million to $48 million because of increased spending on R&D and also the amortization of the cost of acquiring HCT. However, these are the costs of expanding the new business line.

The buyer of AMAT’s solar products is still a mystery as the SEC filing identifies them only as, "a privately held corporation based outside the United States." However, more information may become available at the announcement of quarterly results in May. What we do know is that the size of the project is massive as the amount of solar panels produced will produce about a gigawatt of energy. For perspective, the total energy potential produced by solar panel makers last year was just 12 gigawatts.

Clean energy is certainly a hot topic right now, but the unfortunate truth is that clean and cost-effective rarely coincide in one product. However, as oil and gas prices continue to skyrocket, more and more companies will find incentive to innovate.

Applied Materials took a definite risk in trying to become a solar energy industry leader, but it appears with their biggest ever contract their risk will have a significant reward. Shares of AMAT rose almost 8% since the deal was made public, but even at currently levels the stock is still relatively undervalued. Price-to-cash flow is still below its normal range by about 20%, while price to sales is within its normal historical range.

Ockham Research is affirming our buy rating on Applied Materials and we have set a long term price target of $30.

Disclosure: None

Comments

[tessant]

amat is going to be a huge winner in the solar space...and just think how much better their profits will be when the semi cycle gets out of this hole...

scott
growthportfolio
"the facebook of investing"

[JimieA]

Ockham Research should do a little better "research". It would add a little credibility to thies blog.

AMAT got into the solar business with their purchase of Applied Films in July 2006 for $328M.
Also, since revenues from the AMAT's solar equipment business is part of (but not all) of their "Energy and Environmental Solutions " segment which had revenues of $122M in the 1st quarter of 2008, it seems doubtful if Ockham is correct that AMAT's solar panel business had $260M of revenue in that quarter.