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.
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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| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
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
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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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