Applied Materials: Positive Signals From A Torrid Buyback Pace

| About: Applied Materials, (AMAT)

Summary

Applied Materials completed a $3 billion stock repurchase program within nearly a year as the stock dipped to multi-year lows.

The semiconductor equipment company announced a smaller $2 billion program with the stock hitting multi-year highs.

The company is still sending off positive signs though not nearly the bullish level as the last few quarters.

Despite a surging stock price, Applied Materials (NASDAQ:AMAT) keeps on a torrid stock repurchase pace. With a meager 1.7% dividend yield, the capital return program is almost completely focused on stock buybacks.

The stock incredibly hit a low of $14 back during August and has seen the stock rise at a torrid pace in accordance with the stock buyback levels. Now the question is whether the stock is worth chasing close to multi-year highs around $25 and up nearly 75% from the lows in less than a year?

Stock Buybacks

Applied Materials has aggressively repurchased stock since announcing a large buyback plan on April 26 last year. The company originally approved the purchase of $3 billion worth of stock after the termination of the agreement for a business combination with Tokyo Electron.

At the time, the stock initially slumped below $20 and continued heading down for six months before reaching a low. With the company announcing the completion of the $3 billion buyback program on June 9 and with the stock at nearly $25 now, Applied Materials is clearly adept on purchasing stock on dips.

The semiconductor equipment manufacturer made the following purchases over the last year including the estimated amount spent during the current quarter.

  • FQ3'15A - $625 million
  • FQ4'15A - $700 million
  • FQ1'16A - $625 million
  • FQ2'16A - $900 million
  • FQ3'16E - $150 million

Applied Materials still has half the current quarter to add to the buyback total. The company had roughly $150 million remaining on the original $3 billion buyback program. The timing of the new share buyback suggests more will be spent this quarter though the stock only recently climbed to the current heights.

Predicting More Gains?

The reason all of this data on stock buybacks is important is because Applied Materials approved another $2 billion buyback going forward. The amount is smaller than the $3 billion approved with the last program slightly over a year ago.

The FQ2 results ending April had some interesting data points including large new orders and a forecasted record FQ3 EPS. During the quarter, the company generated $3.5 billion in new orders to hit a level not seen in 15 years. As well, Applied Materials guided to a quarterly EPS of $0.48 at the midpoint that is a huge bump from the $0.33 reported last year.

The record EPS total is dramatically enhanced by the reduced share count. The company ended last quarter with 1.1 million shares and the additional buyback during FQ3 will reduce this number even further.

AMAT Chart

The above chart doesn't include the 45 million shares bought during the last quarter for an average price of $20.

Takeaway

The key investor takeaway is that Applied Materials did an incredible job of purchasing a large amount of shares prior to a historic rebound in orders. The only problem for a new investor is that the company bought at the highest pace during last quarter when the average price paid for a share was only $20. The stock now trades over $24 and the BOD approved a smaller program this year.

The details definitely suggest that the company sees the stock as undervalued in comparison to the business prospect in the future. At this price, Applied Materials is a tentative buy with a recommendation to pile in on any pullbacks if the company is still loading up on stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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Tagged: , , , Semiconductor Equipment & Materials
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