5 Reasons To Buy Applied Materials

| About: Applied Materials, (AMAT)
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Investors who have been looking for a turnaround in Applied Material's (NASDAQ:AMAT) stock got it from the company's Q4 report. Applied Material reported an adjusted profit of $117 million or 18 cent per share compared with a profit of $506 million or $38 38 cents per share a year ago- exceeding analysts 'estimates by 3 cents. Revenue came in at $2.19 billion, beating analysts' estimates of $1.97 billion. The company reported strong demand in most of its core business. This is a major change from previous quarters, so the stock jumped in after hours trading.

Does it mean that the stock is a buy? Yes, for five good reasons:

  1. The company has fully recovered from a temporary setback in its Japanese operations in the aftermath of the March 11 earthquake.

  2. Applied Materials is well-positioned to take advantage of the improving industry fundamentals. The company operates in four segments:

  • The Silicon Systems group develops equipment for the chip fabrication process and accounted for 55% of FY 2011 sales.

  • Global Services provides services to improve the efficiency of semiconductor factories and accounted for 20% of FY 2011 sales.

  • The Display segment develops equipment used to produce flat panel displays and accounted for 9% of FY 2011 sales.

  • Finally, Energy and Environmental services produces equipment used in the production of solar cells and energy efficient glass and accounted for 16% of FY 2010 sales.

  1. Solid fundamentals, hefty profit margins, high quarterly growth, and plenty of barriers to entry to its market. Applied Materials has a solid balance sheet with nearly $2.6 billion in cash and only $200 million in long-term debt. On a valuation basis, the stock is relatively cheap, with a low P/E ratio. Based on its projected ROE and retention rate, the long-term sustainable rate of growth in earnings (retention rate times ROE) should be in the range of 12 to 15%. This implies a PEG ratio (based on the current forward P/E ratio) of less than one, indicating a favorable investment opportunity.


Forward PE*

Operating profit margins

Quarterly profit growth (yoy)

Applied Materials




KLA-Tencor Corp (KLAC)




Lam Research(LRCX)




*October 2012

  1. A demonstrated record of innovations - the company has been producing materials for fast growing industries like smartphones and solar panels.
  2. A 2.5% dividend- unusually high for technology companies. Not that bad for a high-technology company in a low interest environment.

The bottom line: Applied Materials is a long-term buy.

Disclosure: I am long AMAT.