ModernGraham Quarterly Valuation Of Applied Materials

Jan. 27, 2015 5:27 PM ETApplied Materials, Inc. (AMAT)
Benjamin Clark profile picture
Benjamin Clark
5.71K Followers

Summary

  • AMAT is suitable for the Enterprising Investor following the ModernGraham approach.
  • According to the ModernGraham valuation model, the company is overvalued at the present time.
  • The market is implying 15.22% earnings growth over the next 7-10 years, which is above the company's actual growth in recent years.

Applied Materials (NASDAQ:AMAT) has generated solid dividend growth and stability over the last ten years, a trait that will attract many investors. However, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here's an updated look at how the company fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.

AMAT Chart

Defensive Investor - Must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - Market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - Current ratio greater than 2 - PASS
  3. Earnings Stability - Positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - Has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - Earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
  6. Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - Must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - Current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - Positive earnings per share for at least 5 years - PASS
  4. Dividend Record - Currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $23.52
MG Value $7.41
MG Opinion Overvalued
Value Based on 3% Growth $8.76
Value Based on 0% Growth $5.13
Market Implied Growth Rate 15.22%
Net Current Asset Value (NCAV) $1.35
PEmg 38.94
Current Ratio 2.47
PB Ratio 3.69


Balance Sheet - October 2014

Current Assets $6,967,000,000
Current Liabilities $2,823,000,000
Total Debt $1,947,000,000
Total Assets $13,174,000,000
Intangible Assets $4,255,000,000
Total Liabilities $5,306,000,000
Outstanding Shares 1,234,000,000


Earnings Per Share

2014 $0.87
2013 $0.21
2012 $0.09
2011 $1.45
2010 $0.70
2009 -$0.23
2008 $0.70
2007 $1.20
2006 $0.97
2005 $0.73
2004 $0.85


Earnings Per Share - ModernGraham

2014 $0.60
2013 $0.46
2012 $0.57
2011 $0.80
2010 $0.54
2009 $0.53


Dividend History

AMAT Dividend Chart

Conclusion

Applied Materials is suitable for the Enterprising Investor, but not the more conservative Defensive Investor, who is concerned with the insufficient earnings growth and stability over the last ten years, as well as the high PEmg and PB ratios. The Enterprising Investor, on the other hand, has no initial concerns. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $0.54 in 2010 to only $0.60 for 2014. This demonstrated growth does not support the market's implied estimate of 15.22%. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.

This article was written by

Benjamin Clark profile picture
5.71K Followers
Benjamin is one of TipRank's top bloggers.  He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.