Stock Spotlight

Applied Materials powers through

 

Applied Materials ($120; AMAT) generates the bulk of its revenue from customers based in Asia, markets disrupted by Covid, supply-chain problems, and U.S. export restrictions. But rather than pull in its horns, the semiconductor-equipment giant kept on investing, developing new products, and adjusting to the new reality.

In the January quarter, the company generated 29% of revenue from Taiwan and 17% from China. A year earlier, China accounted for 32% of revenue, versus 20% from Taiwan. Applied’s robust supply chain and global distribution network enabled the company to go where the business migrated.

This flexibility reflects not luck, but preparation. While semiconductor equipment is about as cyclical as a market can get, Applied possesses the heft, financial depth, and management vision to focus on the long game. The company prioritizes spending on research & development and hardening its supply chain even during downturns — especially during downturns, when smaller rivals often cut back.

Applied expects the semiconductor market to reach $1 trillion by 2030, up from $574 billion in 2022. As the world’s largest provider of equipment to make chips, Applied Materials remains uniquely positioned to benefit from that growth. The stock is rated Focus Buy.

A bright horizon

On Feb. 16, Applied reported sales and profits that topped the consensus. More importantly, the company provided encouraging guidance, which many rivals did not. Applied projects revenue of $6.0 billion to $6.8 billion in the April quarter and per-share profits of $1.84, plus or minus $0.18. These numbers compare favorably to the then-consensus of $6.33 billion in revenue and $1.78 in earnings per share. April-quarter numbers exclude a previously expected $250 million in revenue from a customer hit with a cybersecurity issue. Applied expects to collect all of that revenue by the end of the fiscal year.

After more than two years of a growing backlog, fueled by consistent demand for equipment to upgrade factories, Applied stands ready to chew through a lot of that business in calendar year 2023. Even after the company’s heartening guidance, the Wall Street consensus still calls for sales to dip 4% and per-share profits to fall 4% to 8% in fiscal 2023 and 2024 ending October.

Three parting shots

We’ll end this profile with three more reasons to get excited about Applied Materials:

1) Valuation: These shares trade at 14 times trailing earnings, 30% below their three-year norm and roughly in line with the industry median. At less than 16 times the current-year estimate, Applied sports a 16% discount to the industry.

2) Share buybacks: The share count has declined 5% over the last year and 21% over the last five years as part of the company’s pledge to return at least 80% of free cash flow to shareholders.

3) Rising estimates: Since the company released April-quarter guidance, consensus targets for fiscal 2023 sales and profits have risen 3% and 6%, respectively, yet still seem conservative.

Applied Materials Inc., 3050 Bowers Ave., Santa Clara, CA 95054, (408) 727- 5555, www.appliedmaterials.com.

 

 

 

 

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