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Applied Materials Inc Valuation – April 2018 $AMAT

Company Profile (excerpt from Reuters): Applied Materials, Inc. (Applied), incorporated on March 18, 1987, provides manufacturing equipment, services and software to the global semiconductor, display and related industries. The Company’s segments are Semiconductor Systems; Applied Global Services; Display and Adjacent Markets, and Corporate and Other. The Semiconductor Systems segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging and ion implantation. Its Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar products. The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), upgrades and roll-to-roll Web coating systems and other display technologies for televisions, personal computers, smart phones and other consumer-oriented devices. The Corporate and Other segment includes revenues from products, as well as costs of products sold for fabricating solar photovoltaic cells and modules, and certain operating expenses.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AMAT – April 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $56,839,216,535 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.96 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 355.21% Pass
6. Moderate PEmg Ratio PEmg < 20 20.27 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 6.90 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.96 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.61 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.70
MG Growth Estimate 15.00%
MG Value $104.10
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $39.21
MG Value based on 0% Growth $22.98
Market Implied Growth Rate 5.88%
Current Price $54.80
% of Intrinsic Value 52.64%

Applied Materials, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.6 in 2014 to an estimated $2.7 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.88% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Applied Materials, Inc. revealed the company was trading above its Graham Number of $28.28. The company pays a dividend of $0.4 per share, for a yield of 0.7% Its PEmg (price over earnings per share – ModernGraham) was 20.27, which was below the industry average of 51.31, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.75.

Applied Materials, Inc. performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $1.75
Graham Number $28.28
PEmg 20.27
Current Ratio 2.96
PB Ratio 6.90
Current Dividend $0.40
Dividend Yield 0.73%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2018
Total Current Assets $13,029,000,000
Total Current Liabilities $4,399,000,000
Long-Term Debt $5,305,000,000
Total Assets $19,663,000,000
Intangible Assets $3,730,000,000
Total Liabilities $11,157,000,000
Shares Outstanding (Diluted Average) 1,071,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.03
Oct2017 $3.17
Oct2016 $1.54
Oct2015 $1.12
Oct2014 $0.87
Oct2013 $0.21
Oct2012 $0.09
Oct2011 $1.45
Oct2010 $0.70
Oct2009 -$0.23
Oct2008 $0.70
Oct2007 $1.20
Oct2006 $0.97
Oct2005 $0.73
Oct2004 $0.78
Oct2003 -$0.09
Oct2002 $0.16
Oct2001 $0.30
Oct2000 $1.20
Oct1999 $0.46
Oct1998 $0.15

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.70
Oct2017 $1.82
Oct2016 $1.02
Oct2015 $0.76
Oct2014 $0.60
Oct2013 $0.46
Oct2012 $0.57
Oct2011 $0.80
Oct2010 $0.54
Oct2009 $0.53
Oct2008 $0.90
Oct2007 $0.90
Oct2006 $0.67
Oct2005 $0.47
Oct2004 $0.39
Oct2003 $0.26
Oct2002 $0.44

Recommended Reading:

Other ModernGraham posts about the company

Applied Materials Inc Valuation – February 2016 $AMAT
Applied Materials Inc Valuation – November 2015 Update $AMAT
Applied Materials Inc. Analysis – August 2015 Update $AMAT
47 Companies in the Spotlight This Week – 5/16/15
Applied Materials Inc. Quarterly Valuation – May 2015 $AMAT

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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