Applied Materials Remains Committed To Solar Division Business, Despite Slump

| About: Applied Materials, (AMAT)
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Quick Take

  • Applied Materials’ (NASDAQ:AMAT) solar division President dismissed rumors of the company exiting the solar PV equipment market by confirming that the company is committed towards driving growth in the segment.
  • The solar industry is plagued by weak demand and persistent overcapacity; Applied’s solar division revenue declined by 85% and it incurred a loss of $668 million in 2012
  • Given the growing awareness about the benefits of solar energy, we believe the fundamental trends in solar energy adoption provide a solid long term platform. The solar PV equipment industry could turnaround 2013 onward.
  • The acquisition of Varian enhances Applied’s EES portfolio as Varian’s technology has a great potential in solar cell manufacturing.
  • We believe that Applied’s declining solar revenue are more on account of industry trends and thus estimate its market share to remain constant.
  • Applied’s restructuring plan for its solar division aims to reduce the divisional operational expense to $25 million per quarter, and its margins could turn positive in the future.

On account of persistent overcapacity and weak demand in the solar industry, Applied Materials' revenue from its energy and environmental solutions (EES) segment declined by 85% in 2012, and the division incurred an operating loss of $668 million for the year as compared to a profit of $453 million in 2011. The capacity expansions taken up by photovoltaic (PV) manufacturers during the past two years have caused the global manufacturing capacity to significantly exceed demand. Consequently, the uncertain demand outlook combined with overcapacity has led to substantial cuts to capital spending by PV manufacturers, which has led to a decline in demand for Applied’s equipment.

Dismissing rumors that it was planning to exit the market, Applied’s solar division President, Charlie Gay, declared in March that the company was very much committed towards its solar PV business division. Though it maintains a cautious approach as the investment in new capacity remains low, Applied claims that the growth in demand is starting to consume the excess manufacturing capacity in the solar industry.

Given the increasing awareness about the benefits of solar energy, we believe that the solar business could be an important long term growth driver for Applied Materials. While the slower-than-anticipated revival has led to a significant decline in the market in 2012, we estimate the situation to stabilize in the future.

Solar PV Equipment Market Could See A Turnaround After 2013

The solar equipment market is dependent on the sales of solar PV and thin-film products to solar energy companies, and currently the industry is suffering from low demand coupled with excess manufacturing capacity. In 2010, the global PV market demand grew by 84%. However, the slowdown in global solar market led to overcapacity and consequently industry growth has significantly declined since.

Though the timing of solar equipment recovery still remains uncertain, we believe the fundamental trends in solar energy adoption provide a solid, long term platform. According to the findings of Applied Materials’ fourth annual solar energy survey conducted in China, India, Japan and the United States, we see higher-than-expected growth in demand for solar power in the future.

With growing awareness about the benefits of renewable energy combined with declining costs, we believe that there is bound to be an increase in demand for solar power use in the years ahead. We forecast the solar PV market to further decline (at a marginal rate) in 2013, but grow at an average annual rate of 5% for the remaining period under review.

With An Expanded Product Portfolio Applied Can Retain Its Market Share

Applied’s share in the solar PV equipment market declined from 20.2% in 2009 to 6.2% in 2012, primarily due to the discontinuation of its SunFab product line which offered products for thin-film manufacturing. We do not believe that the drop in revenues from the solar division are due to reasons intrinsic to the company, and thus estimate its market share to be constant for the period under review.

In November 2011, Applied acquired Varian Semiconductors (NASDAQ:VSEA), a leader in ion implantation equipment, a market that represents an annual opportunity approaching $1.5 billion. The acquisition of Varian enhances Applied’s EES portfolio as Varian’s technology has a great potential in solar cell manufacturing.

Applied promises to offer state-of-the-art technology that can enable an increase in cell efficiency and lower cost per watt. The company claims that given a reasonable solar demand, it can add around $100 million per gigawatt of new capacity.

Applied’s Restructuring Program Will Reduce EES Cost Base

Witnessing a steep decline in its EES orders, Applied announced a restructuring plan for the business in Q3 2012, to lower its cost structure and operating break-even level to approximately $500 million. As the demand in the solar industry remains sluggish, it plans to take additional steps to reduce its cost base and minimize associated losses. By the end of fiscal 2013, the company aims to reduce EES operating expenses to $25 million per quarter.

Our price estimate of $13.46 for Applied Materials is almost in line with the current market price.

Disclosure: No positions.