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Applied Material (AMAT) quick review - Not an investment for me!

|Includes:Applied Materials, Inc. (AMAT)


Applied Materials currently trades at $10.6.  I placed it in the idea pipeline on the basis of Morningstar’s 5-star wide-moat rating.

 1- Business Performance Risk



FCF / Sales

Last twelve months (“LTM”) was 15%, in line with historical performance over the last 10 years between 11% and 20% with a couple years, including 2009 at only 1-2%.


LTM: 8.5%, over the last 10 years ROE has varied between -4% and 22%, with an average in the single digits.


LTM: 6%. Historically ROA’s have been volatile going from -3% up to 17%!  The average is also in the single digits

Revenue Growth

Over the last 10 years AMAT is essentially flat, with very high fluctuations up and down.

Cash distribution to shareholders

AMAT initiated a dividend in 2005 and has increased its payments almost annually since then.   The current dividend yield is 2.4%, lower than the S&P 500 as a whole. AMAT also buys back a fair amount of share, with a reduction of about 20% in # of shares over the last 5-6 years

AMAT is extremely volatile with revenues essentially flat over the last 10 years but with bumps of +80% and -30% year over year. This in turns is reflected in the company’s ROE’s, ROA’s and cash flow generation.  This type of cyclicality is a non-starter for me as I have no particular insight in evaluating the business cycle of AMAT.

2- Balance Sheet Risk



LT Debt / Equity

0.03x! AMAT carries almost no debt

Current Ratio

2.27x, which is conservative

The company is very conservatively financed, which makes sense given its volatile nature.

 3- Valuation Risk



Cash Return

10.1%, which is quite attractive!


23.5x, slightly lower than the industry and much higher than the S&P

The valuation metrics for AMAT tell a dual story: the company appears to be highly valued on a P/E basis with a P/E >20x (which is too high for me) and yet has an attractive cash return of 10%.  However given the cyclicality of the business it is difficult to evaluate if the cash valuation can stay attractive longer term given.


I will pass on AMAT as the business is very cyclical.  While AMAT seems nicely managing cash returns (mix of dividends and buybacks) I would not be comfortable owning the company if the markets were to close for a long time. 


Disclosure: No position
Stocks: AMAT