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.
Defensive Investor - Must pass at least 6 of the following 7 tests: Score = 3/7
Enterprising Investor - Must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
|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|
Balance Sheet - October 2014
Earnings Per Share
Earnings Per Share - ModernGraham
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.
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