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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a... More
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  • Applied Material (AMAT) quick review - Not an investment for me! 4 comments
    Sep 24, 2010 6:27 PM | about stocks: 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
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Comments (4)
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  • bluegillfish
    , contributor
    Comments (42) | Send Message
    If you had a scientific background you would consider the fact AMAT is the cream of the top in nano, tech, etc.


    Amat is poised to led high tech for years to come.
    26 Sep 2010, 02:55 PM Reply Like
  • Margin of Safety Investing
    , contributor
    Comments (107) | Send Message
    Author’s reply » Hello Bluegillfish,
    I don't disagree that AMAT is a great company from a tech perspective. But just looking at it from a financial perspective I have been disappointed. I started my review of AMAT thinking that such a great name was probably a great investment ... and found otherwise.
    What do you think will drive AMAT's returns in the future?
    Thank you
    26 Sep 2010, 08:48 PM Reply Like
  • bluegillfish
    , contributor
    Comments (42) | Send Message
    Led's; amat is working on a LED machine, has been for quite awhile; does not want to market an inferior product; Veco and Axitron are current leaders. Betting Amat will soon market a great machine.


    Amat has the best scientist and support for R&D; betting on long term growth of state of the art semi- making machines
    27 Sep 2010, 01:24 PM Reply Like
  • Margin of Safety Investing
    , contributor
    Comments (107) | Send Message
    Author’s reply » Great, maybe that gives a good opportunity for a "growth investor" to enter then?
    27 Sep 2010, 04:49 PM Reply Like
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