Is Applied Materials a High-Risk Investment?

With shares of Applied Materials (NASDAQ:AMAT) trading at around $13.08, is AMAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Applied Materials is a provider of manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic, and related industries worldwide. In other words, it’s kind of a big deal. And when a company is a big deal, it tends to have many positives and negatives.

Positives:

  • Average analyst target price of $14.34
  • 3.10 percent yield (higher than peers)
  • Quality debt management
  • Diversified product portfolio
  • 44 percent increase in Q1 orders on a sequential basis
  • Company expects NAND demand to increase 50 percent in 2013
  • Strong global reach
  • Strong demand for transistor products
  • Company believes it has capacity to increase market share in wafer fab equipment

Negatives:

  • Revenue decline in 2012
  • EPS decline in 2012
  • Weak margins compared to peers
  • Poor valuation compared to industry average (Trailing PE of 623.10 vs. 18.59)
  • Revenue declined 28 percent last quarter year-over-year
  • Declining prices, oversupply, and weak demand in solar
  • Subpar stock performance in bull market

As far as solar is concerned, Applied Materials isn’t throwing in the towel, which had been rumored. Whether this is a positive or a negative is debatable. A lot would depend on the time frame. For those looking out over the next few years, it would likely be a negative. For those looking out over the next decade and beyond, it would likely be a positive. However, would Applied Materials stick around that long? We don’t know. What we do know is that Applied Materials is aiming for an increase in cell efficiency and lower cost per watt. It seems as though anything related to the solar industry is about cutting costs in the current environment. The days of sustainable and profitable growth might be well in the future.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Applied Materials, KLA-Tencor Corporation (NASDAQ:KLAC), and Lam Research Corporation (NASDAQ:LRCX). Applied Materials has a market cap of $15.53 billion, KLA-Tencor has a market cap of $8.87 billion, and Lam Research has a market cap of $6.79 billion.

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

AMAT

KLAC

LRCX

Trailing   P/E

623.10

13.14

87.90

Forward   P/E

12.34

11.59

11.43

Profit   Margin

0.32%

22.24%

2.30%

ROE

0.33%

21.97%

2.04%

Operating   Cash Flow

$1.69 Billion

$858.24 Million

 $685.60 Million

Dividend   Yield

3.10%

3.00%

N/A

Short   Position

1.30%

2.50%

4.20%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal        

The debt-to-equity ratio for Applied Materials is close to the industry average of 0.30.

Debt-To-Equity

Cash

Long-Term Debt

AMAT

0.27

$1.75 Billion

$1.95 Billion

KLAC

0.22

$2.58 Billion

$747.10 Million

LRCX

0.27

$2.52 Billion

$1.29 Billion

 

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

T = Technicals Are Mixed       

Applied Materials has had its ups and downs over the past three years, which makes that generous 3.10 yield important.

1 Month

Year-To-Date

1 Year

3 Year

AMAT

0.96%

15.13%

14.76%

-1.76%

KLAC

4.90%

13.38%

5.34%

75.14%

LRCX

2.98%

15.80%

3.59%

4.63%

 

At $13.08, Applied Materials is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

13.44

100-Day   SMA

12.58

200-Day   SMA

11.86

 

E = Earnings Have Been Inconsistent                             

Earnings have been inconsistent over the past five years. This has been during a time that most companies throughout the broader market have shown consistent improvements in earnings on an annual basis. However, earnings can be manipulated. Revenue is a different story. In regards to revenue, there was a big jump from 2009 to 2010, but that should have been expected since the market was coming from a substantial low. There was another improvement in 2011, but the pace had slowed considerably. Then, as a layman with not prophetic powers could have predicted, revenue declined in 2012. However, Applied Materials shouldn’t feel isolated. Revenue declines in 2012 have been a common trend throughout the broader market. It’s a sign that global demand is slowing in most industries.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

8.13

5.01

9.55

10.52

8.72

Diluted   EPS ($)

0.70

-0.23

0.70

1.45

0.09

 

When we look at the previous quarter on a year-over-year basis, we see declines in revenue and earnings. On a sequential basis, revenue declined and earnings improved.

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   billions

2.19

2.54

2.34

1.65

1.57

Diluted   EPS ($)

0.09

0.22

0.17

-0.39

0.03

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

If the global economy slows, then capital expenditure budgets are likely to shrink, which would be bad news for Applied Materials and friends. If the recent bull run in the market proves to be based on actual economic growth, then all systems are go.

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

Applied Materials is a solid company (for the most part). The problem is that the stock is highly sensitive to market corrections. The market might hold up, but is it worth the risk when there are safer plays available? The annual revenue trend is also cause for concern.

The following opinion might lead investors to a missed opportunity, but capital preservation is always the number one priority here.

Applied Materials is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

More Articles About:   , ,  

More from The Cheat Sheet