Applied Materials Process Advantages Build Market Share [August 21, 2013]
One reason I like to have stocks like AMAT in my portfolio, besides the dividend, is that most investors have very short time horizons. If Applied Materials non-GAAP EPS is indeed in the vicinity of $1.50 per share for full fiscal 2016, then it should be around $30 per share then. Almost doubling what it can be bought for today.
Doubling in 3 years is actually great returns. But so many investors are just thinking about what returns they can get within the next quarter, or the next few hours if they are day trading, or the next few nanoseconds if they are computer algorithms, that this long-term value is overlooked. And in many cases, three years from now the investors who pursued what they thought were short-term opportunities will not have doubled their money. A substantial percentage will have halved their money, or worse.
I do have some of my portfolio in high-risk, potentially high gain small cap stocks, but the bulk of it is in Nasdaq 100 stocks or stocks that could potentially join that index.
Showing posts with label amat. Show all posts
Showing posts with label amat. Show all posts
Wednesday, August 21, 2013
Thursday, August 15, 2013
Applied Materials Sees Market Share Gains from R&D efforts
Applied Materials (AMAT) issued July quarter results that were within guidance and therefore probably a disappointment to speculators.
You can read my notes here: Applied Materials fiscal Q3 2013 Analyst Call
Applied Materials makes the rather expensive machines that are used to make semiconductor chips. The optimistic part of the presentation I found believable was that AMAT has been able to cut administrative expenses and move the money over to use for R&D. The result is new, improved machines that will gain market share, in particular as the newer 20 nm-ish process node goes mainstream in 2014.
In any case Applied Materials generates a lot of cash and pays a nice dividend. It is one of the safest stocks I own, and if 2014 is a good year, hopefully they will increase the dividend again.
I hope to write at more length for Seeking Alpha, but I have several other companies on my list at this point, so it could be a while.
You can read my notes here: Applied Materials fiscal Q3 2013 Analyst Call
Applied Materials makes the rather expensive machines that are used to make semiconductor chips. The optimistic part of the presentation I found believable was that AMAT has been able to cut administrative expenses and move the money over to use for R&D. The result is new, improved machines that will gain market share, in particular as the newer 20 nm-ish process node goes mainstream in 2014.
In any case Applied Materials generates a lot of cash and pays a nice dividend. It is one of the safest stocks I own, and if 2014 is a good year, hopefully they will increase the dividend again.
I hope to write at more length for Seeking Alpha, but I have several other companies on my list at this point, so it could be a while.
Monday, April 22, 2013
Applied Materials, Process Nodes, and Future Profits
Applied Materials (AMAT) makes capital equipment for semiconductor chip manufacturing. Demand in that sector has not been robust these last couple of years, although it has come off the bottom that lagged after the recession. This article will look at AMAT as a long-term investment, not a short term trade. Given that, the first thing to note is that it pays a dividend, which is currently $0.10 per quarter, or 3.1% per year at the current $13.06 stock price.
I believe the largest factor determining future AMAT revenue and profit will be the ongoing trend towards new, small process nodes (indicated by the size of the lines used to put transistors in chips. 32 nanometer is older than 28 nm.) But let's start with where we are now.
AMAT last reported on February 13 for the first fiscal fiscal quarter of 2013, which ended January 28, 2013. Against an overall global semiconductor capital equipment spending drop of 16% in 2012, AMAT reported revenues of $1.57 billion, down 5% sequentially from $1.65 billion and down 28% from $2.19 billion in the year-earlier quarter. That is discouraging, for certain.
Applied's core semiconductor equipment business saw a Q1 y/y decline to $969 million from $1.34 billion, a decline of 28%. Its display screen segment did better, but the solar segment did worse. Display revenue dropped 17% y/y to $87 million from $104 million, which was already low by historic standards. Solar revenue dropped 77% y/y to $47 million from $206 million. There is a glut of solar supply in the market, so no turn around is expected until at least 2015. Display may see some rebound in 2013 as screen sizes start to increase in developing markets and new screen technologies are adapted.
The bulk of Applied's revenue and profit comes from the semiconductor segment. It is well known that demand for PCs has been down, and it is hard to predict where the bottom may lay. Demand for tablets and smartphones has been increasing. Overall demand is dampened because smartphones simply contain far less silicon than PC's do. They have weaker processing chips and far less memory.
Does that mean Applied and other semiconductor equipment manufacturers should be written off as dinosaurs? I think not. I think overall computational demand will continue to increase rapidly for at least the next two decades. To cram more computation into portable devices (and the computers in the cloud that serve those devices) the industry will continue to move to smaller process nodes.
Right now demand is still high at the 28 nm node. Most chips, which work in legacy, non-mobile applications, are still made at much older nodes. For high-end graphics chips from AMD and NVIDIA, 28 nm is the cutting edge. Intel is already manufacturing its newest CPUs at 20 nm, and new memory-chip production at Samsung is just started at 10 nm. Memory process nodes typically can be smaller than computing process nodes. The most advanced ARM-based chips were recently taped out at 16 nm at TSMC.
Smaller (newer) process nodes mean that more capability can be built into mobile devices (and also non-mobile devices). Transitions to 14 nm and 20 nm are almost entirely ahead of the industry. To some extent moving to these nodes may open up capacity at 28 nm, but there is a lot of technology out there that has yet to migrate to 28 nm.
The other factor is overall demand, and that depends on the global economy and the frequency of consumer upgrades. There is a lot of old equipment out there, as seen by the high percentage of PCs still running Windows XP. With the exception on Intel, Samsung, IBM, and a few others, most chip makers are now really chip designers who send their designs to foundries like TSMC and Globalfoundries for actual production. These foundries don't want to have capital equipment sitting idle, but neither do they want to lose business because of insufficient capacity.
Generally capacity has been lean since the recession, which is one reason why there has been a shortage of 28 nm capacity. The other reason 28 nm has been tight is it was harder to get it working with good yields than had been expected There is quite a bit of impatience right now among the more cutting-edge designers because of a lack of sub-28 nm capacity.
Anything under 28 nm is far more expensive to make than 28 nm. Only Intel and Samsung have had the vast capital resources to simply move to the lower nodes without concern about how much demand would be there at startup. Even Intel announced it was cutting back capital equipment spending by $1 billion in 2013 due to lower demand projections.
But what is bad for foundries is good for AMAT and other equipment manufacturers: future nodes will require far more spending on capital equipment. One reason is that some 20 nm chips will have a 3-D structure. This means a move away from lithography defined shrinking to process-defined, where with precision engineering AMAT claims a considerable advantage.
In addition to reporting revenue, AMAT reports orders for each quarter. The good news for Q1 was that orders of $2.11 billion were well above revenue and up 31% from orders in Q4, as well as up 5% y/y.
Guidance is for Q2 fiscal 2013 revenue to be up 15 to 25% sequentially. Non-GAAP EPS is expected between $0.09 and $0.15.
While Applied Materials has substantial competition in each of the types of tools that are needed for semiconductor manufacturing, it is second in overall sales revenue only to ASML in an industry where scale matters. ASML is not much bigger: it had sales of $7.9 billion in 2011, AMAT had $7.4 billion. Another American competitor is KLA-Tencor, which had $3.1 billion in sales, placing it fourth globally.
On the whole, I think it is likely that 2013 will be a year of improvement for AMAT, and with major gearing up for 20 nm in 2014, that will be a very good year. How much improvement depends on the degree of strengthening global demand for semiconductor chips.
Disclaimer: I am a long-term investor in AMAT. I also am long AMD, but do not own any other company mentioned in this article. I will not buy or sell AMAT stock for one week following this article's publication date.
See also:
My main AMAT analyst conferences page.
My Q1 2013 AMAT analyst conference notes
www.appliedmaterials.com
I believe the largest factor determining future AMAT revenue and profit will be the ongoing trend towards new, small process nodes (indicated by the size of the lines used to put transistors in chips. 32 nanometer is older than 28 nm.) But let's start with where we are now.
AMAT last reported on February 13 for the first fiscal fiscal quarter of 2013, which ended January 28, 2013. Against an overall global semiconductor capital equipment spending drop of 16% in 2012, AMAT reported revenues of $1.57 billion, down 5% sequentially from $1.65 billion and down 28% from $2.19 billion in the year-earlier quarter. That is discouraging, for certain.
Applied's core semiconductor equipment business saw a Q1 y/y decline to $969 million from $1.34 billion, a decline of 28%. Its display screen segment did better, but the solar segment did worse. Display revenue dropped 17% y/y to $87 million from $104 million, which was already low by historic standards. Solar revenue dropped 77% y/y to $47 million from $206 million. There is a glut of solar supply in the market, so no turn around is expected until at least 2015. Display may see some rebound in 2013 as screen sizes start to increase in developing markets and new screen technologies are adapted.
The bulk of Applied's revenue and profit comes from the semiconductor segment. It is well known that demand for PCs has been down, and it is hard to predict where the bottom may lay. Demand for tablets and smartphones has been increasing. Overall demand is dampened because smartphones simply contain far less silicon than PC's do. They have weaker processing chips and far less memory.
Does that mean Applied and other semiconductor equipment manufacturers should be written off as dinosaurs? I think not. I think overall computational demand will continue to increase rapidly for at least the next two decades. To cram more computation into portable devices (and the computers in the cloud that serve those devices) the industry will continue to move to smaller process nodes.
Right now demand is still high at the 28 nm node. Most chips, which work in legacy, non-mobile applications, are still made at much older nodes. For high-end graphics chips from AMD and NVIDIA, 28 nm is the cutting edge. Intel is already manufacturing its newest CPUs at 20 nm, and new memory-chip production at Samsung is just started at 10 nm. Memory process nodes typically can be smaller than computing process nodes. The most advanced ARM-based chips were recently taped out at 16 nm at TSMC.
Smaller (newer) process nodes mean that more capability can be built into mobile devices (and also non-mobile devices). Transitions to 14 nm and 20 nm are almost entirely ahead of the industry. To some extent moving to these nodes may open up capacity at 28 nm, but there is a lot of technology out there that has yet to migrate to 28 nm.
The other factor is overall demand, and that depends on the global economy and the frequency of consumer upgrades. There is a lot of old equipment out there, as seen by the high percentage of PCs still running Windows XP. With the exception on Intel, Samsung, IBM, and a few others, most chip makers are now really chip designers who send their designs to foundries like TSMC and Globalfoundries for actual production. These foundries don't want to have capital equipment sitting idle, but neither do they want to lose business because of insufficient capacity.
Generally capacity has been lean since the recession, which is one reason why there has been a shortage of 28 nm capacity. The other reason 28 nm has been tight is it was harder to get it working with good yields than had been expected There is quite a bit of impatience right now among the more cutting-edge designers because of a lack of sub-28 nm capacity.
Anything under 28 nm is far more expensive to make than 28 nm. Only Intel and Samsung have had the vast capital resources to simply move to the lower nodes without concern about how much demand would be there at startup. Even Intel announced it was cutting back capital equipment spending by $1 billion in 2013 due to lower demand projections.
But what is bad for foundries is good for AMAT and other equipment manufacturers: future nodes will require far more spending on capital equipment. One reason is that some 20 nm chips will have a 3-D structure. This means a move away from lithography defined shrinking to process-defined, where with precision engineering AMAT claims a considerable advantage.
In addition to reporting revenue, AMAT reports orders for each quarter. The good news for Q1 was that orders of $2.11 billion were well above revenue and up 31% from orders in Q4, as well as up 5% y/y.
Guidance is for Q2 fiscal 2013 revenue to be up 15 to 25% sequentially. Non-GAAP EPS is expected between $0.09 and $0.15.
While Applied Materials has substantial competition in each of the types of tools that are needed for semiconductor manufacturing, it is second in overall sales revenue only to ASML in an industry where scale matters. ASML is not much bigger: it had sales of $7.9 billion in 2011, AMAT had $7.4 billion. Another American competitor is KLA-Tencor, which had $3.1 billion in sales, placing it fourth globally.
On the whole, I think it is likely that 2013 will be a year of improvement for AMAT, and with major gearing up for 20 nm in 2014, that will be a very good year. How much improvement depends on the degree of strengthening global demand for semiconductor chips.
Disclaimer: I am a long-term investor in AMAT. I also am long AMD, but do not own any other company mentioned in this article. I will not buy or sell AMAT stock for one week following this article's publication date.
See also:
My main AMAT analyst conferences page.
My Q1 2013 AMAT analyst conference notes
www.appliedmaterials.com
Tuesday, August 28, 2012
Applied Materials Q3: Trend or Dip?
Applied Materials (AMAT), the semiconductor capital equipment maker, reported worse than expected revenue and earnings for fiscal Q3 when it reported on August 15, 2012. Contrast my story about Applied's Q1, where I said results came in better than expected because "a couple of large foundries placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones."
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
See also the Applied Materials web site.
And keep diversified!
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
See also the Applied Materials web site.
And keep diversified!
Saturday, February 18, 2012
Applied Materials Q1 Boosted by Mobile Demand
Applied Materials (AMAT), the semiconductor capital equipment maker, reported better than expected revenue and earnings Thursday for its first quarter fiscal 2012 ending January 30, 2012. Although the stock traded up after-hours on Thursday, by the end of day Friday it closed at $12.99, down $0.22 or 1.7% from the Thursday close.
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Friday, December 9, 2011
Applied Materials See Cycle Bottom
Applied Materials (AMAT), the semiconductor capital equipment maker, had a very difficult fourth quarter of fiscal 2011 ending October 30th. The stock is trading trading today around $11.20 per share, less than 8 times earnings and not that much above its 52 week low of $9.70 touched on October 4.
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Saturday, May 28, 2011
Applied Materials Rocks Q2
Applied Materials, the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its second quarter of fiscal 2011 ending May1. The stock traded down on Friday based on management's cautious guidance for the remainder of 2011.
Prior guidance had been for Q2 sequentially flat to up 5% from Q1 revenues of $2.69 billion, with non-GAAP EPS of $0.34 to $0.38. Instead revenues came in at $2.86 billion, up 7% sequentially from $2.69 billion, and up 25% from $2.30 billion in the year-earlier quarter. Non-GAAP EPS was at the high end of guidance, $0.38.
Prior guidance on full fiscal 2011 revenues was over $11 billion and non-GAAP EPS was over $1.50. Management now said that is the high end of a range that depends on demand in Q3 and Q4.
The dividend is now 8 cents per quarter, 32 cents per year. There is a lot of room for growth given EPS, but acquiring Varian Semiconductor will eat up much of Applied's $4.6 billion cash and investment balance. Once Varian is digested the dividend could start growing again. At Friday's closing stock price the current dividend is a healthy 2.35%.
Within the semiconductor equipment and servicing industry Applied Materials serves a variety of segments. Variations in the demand cycles in segments and sub-segments account both for the stellar quarter and for the cautious guidance. The solar power division set a record, but revenues exceeded new orders as there are questions about end demand in Europe. Orders exceeded sales in the largest segment, silicon semiconductor manufacturing equipment, but the orders are mostly in new process modes (40 nm and under), driven by mobile end market demand. Large panel display capacity is plentiful, so most orders are to make small panels for smartphones and tablets.
My own view is that there is mainly upside. The Varian Semiconductor acquisition will make Applied very close to a full service provider for foundries. Despite uneveness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor solutions Applied Materials provides.
For more details about Q2 results, including questions by analysts, see my Applied Materials Q2 2011 Analyst Call summary.
I own Applied Materials (AMAT) stock. See also the Applied Materials web site.
See also: http://www.appliedmaterials.com/
Wednesday, March 2, 2011
Applied Materials: Value, Growth, and Tablets
Applied Materials (AMAT), the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its first quarter of fiscal 2011 ending January 31, 2011. Revenue growth was up 45% year over year. Yet its PE (price/earnings) ratio is far lower than most technology stocks with similar growth records.
Trying to place a bet on tablet computers or smart phones? You can bet on the brands like Apple, Motorola, and Samsung. Or you can bet on the companies that supply the chips to make the tablets work, for instance, Qualcomm, TI, NVIDIA, Marvell and others. These are all pretty well known companies, but who really knows who consumers will be in love with in 2 years? Who knows whose chips two years from now will be winning the majority of slots in the new machines?
One thing you can pretty much count on: the constituent parts for tablet computers will be manufactured by someone. When it comes to actually making the silicon, Applied Materials is the dominant supplier of the necessary equipment.
In 2008 and 2009 Applied Materials had a rough time. No new capacity was needed; even shrinks (to smaller transistor sizes) were put off as long as possible. But because the company was well managed and had plenty of cash, it navigated successfully through the recession.
In 2010 Applied came roaring back as fabrication companies started making up for lost time.
Are people going to be satisfied with the computational or memory powers of 2010 style tablets and smart phones? No. The ARM processors are (so far) no match for the silicon from AMD or Intel that is available in a desktop or notebook computer. People may want portability, but they still want highly capable, fast machines. That means cramming more transistors onto chips, and using new technologies that keep voltage and power requirements down. In turn, to achieve that, the fabs need new machines capable of imprinting silicon with ever smaller patterns.
As reported in the Applied Materials February 24, 2011 analyst conference call, different aspects of the industry are at different points in their supply demand cycle. Fortunately overall the cycle is heading up. Display equipment sales will likely be weak in 2011, in part because tablet and smart phone displays are so much smaller than monitor and TV displays. But demand for most major types of silicon chips is headed up, as is demand for the equipment used to make crystalline silicon solar cells.
With $0.38 per share GAAP earnings in Q1 and about the same expected in Q2, it is fair to guess that fiscal 2011 earning will indeed hit at least $1.50 per share, which is AMAT's guidance.
While growth in 2011 won't be as strong as in 2010, I still see Applied's PE rising eventually to about 20. That would put it at $30 per share and still give it a 5% earnings return. As I write this you can buy the stock for just $16.36 per share. Note too that Applied has plenty of cash and pays a $0.28 annual dividend. I'd like to see that dividend raised to something more like a third of earnings, but other than that I think Applied Materials is a great company for stock holders.
See also: www.appliedmaterials.com
Trying to place a bet on tablet computers or smart phones? You can bet on the brands like Apple, Motorola, and Samsung. Or you can bet on the companies that supply the chips to make the tablets work, for instance, Qualcomm, TI, NVIDIA, Marvell and others. These are all pretty well known companies, but who really knows who consumers will be in love with in 2 years? Who knows whose chips two years from now will be winning the majority of slots in the new machines?
One thing you can pretty much count on: the constituent parts for tablet computers will be manufactured by someone. When it comes to actually making the silicon, Applied Materials is the dominant supplier of the necessary equipment.
In 2008 and 2009 Applied Materials had a rough time. No new capacity was needed; even shrinks (to smaller transistor sizes) were put off as long as possible. But because the company was well managed and had plenty of cash, it navigated successfully through the recession.
In 2010 Applied came roaring back as fabrication companies started making up for lost time.
Are people going to be satisfied with the computational or memory powers of 2010 style tablets and smart phones? No. The ARM processors are (so far) no match for the silicon from AMD or Intel that is available in a desktop or notebook computer. People may want portability, but they still want highly capable, fast machines. That means cramming more transistors onto chips, and using new technologies that keep voltage and power requirements down. In turn, to achieve that, the fabs need new machines capable of imprinting silicon with ever smaller patterns.
As reported in the Applied Materials February 24, 2011 analyst conference call, different aspects of the industry are at different points in their supply demand cycle. Fortunately overall the cycle is heading up. Display equipment sales will likely be weak in 2011, in part because tablet and smart phone displays are so much smaller than monitor and TV displays. But demand for most major types of silicon chips is headed up, as is demand for the equipment used to make crystalline silicon solar cells.
With $0.38 per share GAAP earnings in Q1 and about the same expected in Q2, it is fair to guess that fiscal 2011 earning will indeed hit at least $1.50 per share, which is AMAT's guidance.
While growth in 2011 won't be as strong as in 2010, I still see Applied's PE rising eventually to about 20. That would put it at $30 per share and still give it a 5% earnings return. As I write this you can buy the stock for just $16.36 per share. Note too that Applied has plenty of cash and pays a $0.28 annual dividend. I'd like to see that dividend raised to something more like a third of earnings, but other than that I think Applied Materials is a great company for stock holders.
See also: www.appliedmaterials.com
Monday, August 23, 2010
Applied Materials Q3 2010 Guidance
On August 18th Applied Materials (AMAT) released Q2 results and held the analyst conference call for the quarter. For those trying to see where the electronics industry is heading, it was an important call.
Consumers choosing new computers, smartphones, and big screen displays recognize a limited number of brand name device makers like Apple, HP, Sony, Dell, Nokia, etc. Each of their devices is engineered from a number of components including the casings, displays, and electronic parts. A wide variety of semiconductor parts makers like Intel, AMD, Broadcom, Qualcomm, Marvell, TI, etc., compete to be chosen by the device maker; those are the design wins that point to whether a semiconductor company will grow or fade.
The semiconductor chips themselves are made with specialty capital equipment that must lay down the microscopic circuits that make the magic happen. Every few years the size of the circuit elements decreases, so fabs (after fabrication factories) must buy new capital equipment to provide for cutting edge chip production. A number of steps and hence machines are involved in the process for creating silicon wafers, cleaning, making masks, infusing them with dopants, adding insulators, etching, etc., and testing. As you may have heard lately from, for instance, NVIDIA, when new machines start to come online it often takes time to get them working well enough that the number of defects decreases to the point that most of the chips work when tested.
Applied Materials makes equipment to make semiconductor chips, solar panels, and LCD display panels. 2009 was a dry year. With end consumer (including industrial consumers) demand down for electronic devices, the fabs had plenty of capacity. Orders to AMAT consisted mainly of a few forward-looking fabs that knew that they had to keep shrinking transistors to serve their clients with the most advanced technological needs.
2010, on the other hand, has seen enough return of demand to restart the cycle for Applied. A lot of older production technology was taken off line in 2009. Now most fabs need not just new technology but capacity expansion as well.
Applied Materials has competition in each of its lines, some more so than others. With revenues of $2.52 billion in Q2 2010, up 10% sequentially from $2.30 billion and up 123% from $1.13 billion in Q2 2009, you can see the difference a year makes.
However, management is predicting that Q3 revenue will be flattish to up 5% over Q2. The main semiconductor equipment business is expected to be about flat. Services revenue looks up 10%. LCD display equipment revenue could be up 20%. But there will likely be a 10% to 20% drop in crystalline solar revenues. In addition the thin-film solar (SunFab) business is being reorganized because few governments, banks and companies wanted to take the risk of creating the very-large scale plants required for efficient thin-film operations.
Because fabs are scrambling to deal with current demand levels, a mild softening in the world economy would not cause them to put off plans to buy new equipment. In fact, it could take another year just to catch up. If, like me, you believe a gradual re-acceleration in the global economy is the most likely scenario, then this up cycle for Applied and other semiconductor equipment manufacturers is still in its opening phase.
If non-GAAP comes in at the middle of the guidance range, $0.30 per share, that would annualize to $1.20. At today's closing price of $10.99 per share, investors will be getting earnings of 10.9% per share. That sure beats the returns on bonds and CDs.
See also my notes on Applied Materials Q2 2010 analyst call;
Applied Materials site
Consumers choosing new computers, smartphones, and big screen displays recognize a limited number of brand name device makers like Apple, HP, Sony, Dell, Nokia, etc. Each of their devices is engineered from a number of components including the casings, displays, and electronic parts. A wide variety of semiconductor parts makers like Intel, AMD, Broadcom, Qualcomm, Marvell, TI, etc., compete to be chosen by the device maker; those are the design wins that point to whether a semiconductor company will grow or fade.
The semiconductor chips themselves are made with specialty capital equipment that must lay down the microscopic circuits that make the magic happen. Every few years the size of the circuit elements decreases, so fabs (after fabrication factories) must buy new capital equipment to provide for cutting edge chip production. A number of steps and hence machines are involved in the process for creating silicon wafers, cleaning, making masks, infusing them with dopants, adding insulators, etching, etc., and testing. As you may have heard lately from, for instance, NVIDIA, when new machines start to come online it often takes time to get them working well enough that the number of defects decreases to the point that most of the chips work when tested.
Applied Materials makes equipment to make semiconductor chips, solar panels, and LCD display panels. 2009 was a dry year. With end consumer (including industrial consumers) demand down for electronic devices, the fabs had plenty of capacity. Orders to AMAT consisted mainly of a few forward-looking fabs that knew that they had to keep shrinking transistors to serve their clients with the most advanced technological needs.
2010, on the other hand, has seen enough return of demand to restart the cycle for Applied. A lot of older production technology was taken off line in 2009. Now most fabs need not just new technology but capacity expansion as well.
Applied Materials has competition in each of its lines, some more so than others. With revenues of $2.52 billion in Q2 2010, up 10% sequentially from $2.30 billion and up 123% from $1.13 billion in Q2 2009, you can see the difference a year makes.
However, management is predicting that Q3 revenue will be flattish to up 5% over Q2. The main semiconductor equipment business is expected to be about flat. Services revenue looks up 10%. LCD display equipment revenue could be up 20%. But there will likely be a 10% to 20% drop in crystalline solar revenues. In addition the thin-film solar (SunFab) business is being reorganized because few governments, banks and companies wanted to take the risk of creating the very-large scale plants required for efficient thin-film operations.
Because fabs are scrambling to deal with current demand levels, a mild softening in the world economy would not cause them to put off plans to buy new equipment. In fact, it could take another year just to catch up. If, like me, you believe a gradual re-acceleration in the global economy is the most likely scenario, then this up cycle for Applied and other semiconductor equipment manufacturers is still in its opening phase.
If non-GAAP comes in at the middle of the guidance range, $0.30 per share, that would annualize to $1.20. At today's closing price of $10.99 per share, investors will be getting earnings of 10.9% per share. That sure beats the returns on bonds and CDs.
See also my notes on Applied Materials Q2 2010 analyst call;
Applied Materials site
Sunday, May 23, 2010
Applied Materials (AMAT) Sees Fab Expansions
Applied Materials (AMAT) had a great 2nd fiscal quarter ending May 1, 2010 as reported in its press release and at its analyst conference on May 19, 2010. However, its new amorphous silicon solar sub-segment has run into troubles, which is what most analysts and news stories focussed on. For detail of what the Applied Materials executives said, see my Applied Materials Q2 2010 analyst conference summary.
Overall revenues were up 24% from fiscal Q1 and 125% from Q2 2009. Year earlier was a bad quarter for Applied. As a capital equipment manufacturer (for the semiconductor industry) new orders nearly dried up, and it lost $0.19 per share. But Q2 2010 showed GAAP EPS of $0.20. That sounds like a growth company that should have a high PE multiplier. Partly there were probably some market share gains, but mainly the quick, recent growth is a result of the macro economic cycle.
There is also a technology cycle, where electronic device makers want to squeeze more intelligence into smaller areas of silicon. In 2009 almost all orders were driven by the need for technology upgrades. Now fabs (as semiconductor factories are known) are needing to expand capacity as well. About 60% of sales in the latest quarter were for capacity expansion rather than replacing old technologies.
AMAT reports four sectors: silicon equipment; display equipment; services; and solar cell production equipment. Most of the growth in the quarter was from the silicon division, but display (panels for TVs and monitors) showed growth too. Services were not hit as hard by the recession, and so saw slower growth.
Solar has two basic parts: equipment for making crystaline cells and equipment for making amorphous, or thin-film, solar panels. The amorphous division is newer and looked promissing two years ago. The crystaline division is profitable and growing, but the thin-film division is in trouble. It is lumpier to begin with. It produced huge sheets of solar cells that are designed to be used by electical utility companies. The factories that make the thin films are capital intensive. One order for a plant was cancelled for lack of financing, while the owners of an existing plant went backrupt. As a result Applied took a $83 million inventory charge. Some investors are demanding that Applied kill this division. I think demand for low-cost solar power will ramp, and improvements in thin-film technology will make this a prized technology in a few years, unless the price of oil drops substantially. But only Applied management has the details available to it to make a good decision for stockholders. Of which I am one, by the way.
It is important to keep in mind that most of Applied's revenue and profits come from equipment for making semiconductor chips, and this segment looks to be in a strong growth cycle that should last through at least 2012. There is pent up demand. Many fabless companies like NVIDIA and Marvell are wishing more capacity were available. Demand is highly likely to ramp even more in calendar Q3 and Q4 this year. So AMAT is going to be making and shipping equipment as fast as they can until they catch up with the demand backlog.
Applied Materials has a lot of cash ($3.6 billion) a huge order backlog ($2.99 billion) and pays a dividend. While it is not without its risks, I consider it a safe, solid performer, but not a get-rich-quick stock. Right now, like many stocks, it is pretty obviously undervalued compared to investments like bonds and CDs. It closed Friday at $12.72 per share. Using Q2 GAAP earnings, that equates to a PE ratio of 15.9. Using non-GAAP EPS of $0.22, that makes the PE 14.5 per share. Which is to say earnings are around 6.7%, while dividends work out to 1.9% per year.
See also Applied Materials and its Fiscal Q2 2010 press release.
For my analyst conference summaries from earlier quarters, see Applied Materials analyst conference summaries.
Overall revenues were up 24% from fiscal Q1 and 125% from Q2 2009. Year earlier was a bad quarter for Applied. As a capital equipment manufacturer (for the semiconductor industry) new orders nearly dried up, and it lost $0.19 per share. But Q2 2010 showed GAAP EPS of $0.20. That sounds like a growth company that should have a high PE multiplier. Partly there were probably some market share gains, but mainly the quick, recent growth is a result of the macro economic cycle.
There is also a technology cycle, where electronic device makers want to squeeze more intelligence into smaller areas of silicon. In 2009 almost all orders were driven by the need for technology upgrades. Now fabs (as semiconductor factories are known) are needing to expand capacity as well. About 60% of sales in the latest quarter were for capacity expansion rather than replacing old technologies.
AMAT reports four sectors: silicon equipment; display equipment; services; and solar cell production equipment. Most of the growth in the quarter was from the silicon division, but display (panels for TVs and monitors) showed growth too. Services were not hit as hard by the recession, and so saw slower growth.
Solar has two basic parts: equipment for making crystaline cells and equipment for making amorphous, or thin-film, solar panels. The amorphous division is newer and looked promissing two years ago. The crystaline division is profitable and growing, but the thin-film division is in trouble. It is lumpier to begin with. It produced huge sheets of solar cells that are designed to be used by electical utility companies. The factories that make the thin films are capital intensive. One order for a plant was cancelled for lack of financing, while the owners of an existing plant went backrupt. As a result Applied took a $83 million inventory charge. Some investors are demanding that Applied kill this division. I think demand for low-cost solar power will ramp, and improvements in thin-film technology will make this a prized technology in a few years, unless the price of oil drops substantially. But only Applied management has the details available to it to make a good decision for stockholders. Of which I am one, by the way.
It is important to keep in mind that most of Applied's revenue and profits come from equipment for making semiconductor chips, and this segment looks to be in a strong growth cycle that should last through at least 2012. There is pent up demand. Many fabless companies like NVIDIA and Marvell are wishing more capacity were available. Demand is highly likely to ramp even more in calendar Q3 and Q4 this year. So AMAT is going to be making and shipping equipment as fast as they can until they catch up with the demand backlog.
Applied Materials has a lot of cash ($3.6 billion) a huge order backlog ($2.99 billion) and pays a dividend. While it is not without its risks, I consider it a safe, solid performer, but not a get-rich-quick stock. Right now, like many stocks, it is pretty obviously undervalued compared to investments like bonds and CDs. It closed Friday at $12.72 per share. Using Q2 GAAP earnings, that equates to a PE ratio of 15.9. Using non-GAAP EPS of $0.22, that makes the PE 14.5 per share. Which is to say earnings are around 6.7%, while dividends work out to 1.9% per year.
See also Applied Materials and its Fiscal Q2 2010 press release.
For my analyst conference summaries from earlier quarters, see Applied Materials analyst conference summaries.
Wednesday, March 31, 2010
Applied Materials (AMAT) Predicts Boom
Applied Materials makes the high technology capital equipment that fabricators use to make semiconductor chips, flat-pannel displays, and solar cells. In early 2009 this business was in stall mode. Revenues dropped to $1 billion for the quarter ending April 26, 2009 (AMAT's 2nd fiscal quarter).
In the first calendar quarter electronics sales were down, and chip manufacturers (fabs) thought had too much capacity. The only reason to buy equipment from Applied Materials was to stay on the upgrade path to new technologies, in particular smaller feature sizes.
Lately all the talk in the computer and electronics industry is about supply constraints. The fabs don't have enough capacity for the newest technologies that are in demand. Just for instance, neither AMD nor NVIDIA has been able to get the new high-end graphics chips in quantities desired.
So fabricators in Taiwan and elsewhere are trying to catch up to the curve. So much so that by the time Applied reported its latest earnings (on February 17 for the quarter ending January 31) revenues for the quarter were $1.85 billion, and net income was $82.8 million.
Guidance given on February 17 was for fiscal 2010 revenues to be up 50% over fiscal 2009 revenues.
But it gets better. Semiconductor chip manufacturers are ordering even more broadly just in the last few weeks. So yesterday Applied Materials increased its guidance. It expects fiscal 2010 revenues to be up over 60% from fiscal 2009. Leading the charge is the silicon manufacturing equipment division, which is expected to be up 120%. Lagging is the solar division, which is expected to be flat to slightly up.
Predicting the future is a dangerous business, but they it is a business I am in. Silicon is coming in quantity to nations like India, China, and Brazil in never-before seen quantities. Applied Materials is one of the few companies with the capital and expertise to keep pushing the limits on shrinking the size of the components on the chips. After minimal upgrading in 2008 and 2009, now through at least 2012 should be a major upgrade and expansion cycle for fabs.
There are small electronics and software companies that will grow faster over this period, but Applied Materials right now is both a value and a growth stock. It pays a dividend, 1.78% at this moment's stock price of $13.71. You will probably get most of your returns, however, out of stock appreciation.
I am a long-term AMAT investor.
Keep diverified!
See also my fiscal Q1 2010 Applied Materials analyst conference summary
And of course www.appliedmaterials.com
In the first calendar quarter electronics sales were down, and chip manufacturers (fabs) thought had too much capacity. The only reason to buy equipment from Applied Materials was to stay on the upgrade path to new technologies, in particular smaller feature sizes.
Lately all the talk in the computer and electronics industry is about supply constraints. The fabs don't have enough capacity for the newest technologies that are in demand. Just for instance, neither AMD nor NVIDIA has been able to get the new high-end graphics chips in quantities desired.
So fabricators in Taiwan and elsewhere are trying to catch up to the curve. So much so that by the time Applied reported its latest earnings (on February 17 for the quarter ending January 31) revenues for the quarter were $1.85 billion, and net income was $82.8 million.
Guidance given on February 17 was for fiscal 2010 revenues to be up 50% over fiscal 2009 revenues.
But it gets better. Semiconductor chip manufacturers are ordering even more broadly just in the last few weeks. So yesterday Applied Materials increased its guidance. It expects fiscal 2010 revenues to be up over 60% from fiscal 2009. Leading the charge is the silicon manufacturing equipment division, which is expected to be up 120%. Lagging is the solar division, which is expected to be flat to slightly up.
Predicting the future is a dangerous business, but they it is a business I am in. Silicon is coming in quantity to nations like India, China, and Brazil in never-before seen quantities. Applied Materials is one of the few companies with the capital and expertise to keep pushing the limits on shrinking the size of the components on the chips. After minimal upgrading in 2008 and 2009, now through at least 2012 should be a major upgrade and expansion cycle for fabs.
There are small electronics and software companies that will grow faster over this period, but Applied Materials right now is both a value and a growth stock. It pays a dividend, 1.78% at this moment's stock price of $13.71. You will probably get most of your returns, however, out of stock appreciation.
I am a long-term AMAT investor.
Keep diverified!
See also my fiscal Q1 2010 Applied Materials analyst conference summary
And of course www.appliedmaterials.com
Thursday, February 18, 2010
Applied Materials and NVIDIA correlation
Yesterday I listened to the quarterly analyst conferences for graphic chip maker NVIDIA (NVDA) and semiconductor equipment manufacturer Applied Materials (AMAT). You can see my summaries at:
Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary
One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.
The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.
The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.
So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.
I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.
All bets on technology involve risks. So ...
Keep diversified!
Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary
One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.
The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.
The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.
So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.
I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.
All bets on technology involve risks. So ...
Keep diversified!
Wednesday, May 13, 2009
Applied Materials Segment Performance Varies
Applied Materials (AMAT) is on the ropes. Fortunately it has large cash reserves. It is still paying a dividend (about 2% at this stock price). And it should bounce back when (or if) the global economy starts to recover.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
Tuesday, March 11, 2008
Oil Bubble to Burst?
Noticing that there is a bubble is no big deal. I noticed that there was a stock market bubble in the late 1990's. I noticed that there was a real-estate bubble in the mid 2000's.
And I've noticed that there is an oil bubble that started a couple of years ago.
But calling an end to a bubble is difficult. How do you know when investors are going to collectively realize that all their stocks can't be the next Microsoft?
And given how irrational the Federal Reserve has acted in the past 20 years, even though you could predict that the housing bubble would burst when the Fed raised rates high enough, there was no way to predict when the Fed would get around to acting.
We are in an oil bubble. But that does not mean that the price of oil can't go higher, or that it might not take years instead of months for it to burst.
Consider the counter-argument: the globe has reached peak oil production, but demand is still rising rapidly, so prices will continue to be pushed up.
I believe it is likely that we have reached the vicinity of peak oil production, but Saudi Arabia could flood the global market with oil tomorrow if it desired to, and keep the flood running for at least a couple of decades.
Demand is already being pinched, but converting from oil to other energy sources, or to conservation, is a slow process. Yet it is happening. Talk to any car dealer in the U.S. about what has been selling in 2008, and they will tell you: fuel efficiency. People are sizing down. They are going to size down through all of 2008, and in 2009 Americans will be using a lot less gas.
True, demand in India, China, and other developing countries will increase. But these nations are also rapidly adopting non-oil based energy technologies.
Consider Applied Materials (AMAT) [disclosure:I own this stock]. It sells a line of solar panel factories. That is, it makes all the tools you need to make massive, low cost solar panels. You build a big building and move in one of the factories. You spit out solar panels. Another company paves large sections of the earth with them. Soon all-electric cars will run on the energy from these massive solar installations.
Multiply that example by a thousand other innovative companies and the practical decisions of billions of individual consumers, and you have demand for oil that is drying up. In addition, there is plenty of oil and gas. Do you see people lined up waiting for gas? No. There are no shortages. At least half of the current price of oil is pure speculative fever.
Maybe it is a good thing. Maybe these speculators are doing more to ease global warming than the federal government ever did or ever will do. But if federal taxes had been used to raise gasoline prices to today's level, we would not have a huge federal budget deficit in addition to our other troubles.
I can't say when the bubble will burst. And artificial shortages, like the one caused by the Iraq war, or Enron's gaming, could be created.
Meanwhile real estate is reasonable and stocks are dirt cheap. Food is another matter. We are in that part of the Malthusian cycle when there is not enough food for all the people who have procreated. If you bought sacks of flour last year your return today would be better than most managed stock funds performed.
It is a strange, new world. The pace of change in the 20th century will prove to be nothing compared to changes this century. And one change is coming fast: the end of the Oil Era.
And I've noticed that there is an oil bubble that started a couple of years ago.
But calling an end to a bubble is difficult. How do you know when investors are going to collectively realize that all their stocks can't be the next Microsoft?
And given how irrational the Federal Reserve has acted in the past 20 years, even though you could predict that the housing bubble would burst when the Fed raised rates high enough, there was no way to predict when the Fed would get around to acting.
We are in an oil bubble. But that does not mean that the price of oil can't go higher, or that it might not take years instead of months for it to burst.
Consider the counter-argument: the globe has reached peak oil production, but demand is still rising rapidly, so prices will continue to be pushed up.
I believe it is likely that we have reached the vicinity of peak oil production, but Saudi Arabia could flood the global market with oil tomorrow if it desired to, and keep the flood running for at least a couple of decades.
Demand is already being pinched, but converting from oil to other energy sources, or to conservation, is a slow process. Yet it is happening. Talk to any car dealer in the U.S. about what has been selling in 2008, and they will tell you: fuel efficiency. People are sizing down. They are going to size down through all of 2008, and in 2009 Americans will be using a lot less gas.
True, demand in India, China, and other developing countries will increase. But these nations are also rapidly adopting non-oil based energy technologies.
Consider Applied Materials (AMAT) [disclosure:I own this stock]. It sells a line of solar panel factories. That is, it makes all the tools you need to make massive, low cost solar panels. You build a big building and move in one of the factories. You spit out solar panels. Another company paves large sections of the earth with them. Soon all-electric cars will run on the energy from these massive solar installations.
Multiply that example by a thousand other innovative companies and the practical decisions of billions of individual consumers, and you have demand for oil that is drying up. In addition, there is plenty of oil and gas. Do you see people lined up waiting for gas? No. There are no shortages. At least half of the current price of oil is pure speculative fever.
Maybe it is a good thing. Maybe these speculators are doing more to ease global warming than the federal government ever did or ever will do. But if federal taxes had been used to raise gasoline prices to today's level, we would not have a huge federal budget deficit in addition to our other troubles.
I can't say when the bubble will burst. And artificial shortages, like the one caused by the Iraq war, or Enron's gaming, could be created.
Meanwhile real estate is reasonable and stocks are dirt cheap. Food is another matter. We are in that part of the Malthusian cycle when there is not enough food for all the people who have procreated. If you bought sacks of flour last year your return today would be better than most managed stock funds performed.
It is a strange, new world. The pace of change in the 20th century will prove to be nothing compared to changes this century. And one change is coming fast: the end of the Oil Era.
Wednesday, March 5, 2008
Applied Materials (AMAT) Solar Play
Applied Materials (AMAT) disclosed a deal to sell $1.9 billion in solar cell manufacturing equipment to a non-U.S., privately held, unnamed corporation on Tuesday [See the AMAT SEC filing]. Applied SunFab thin film tandem junction production equipment and installation/warranty services will be used to construct multiple solar factories.
This comes a few weeks after Applied Material's fiscal Q1 2008 analyst conference of February 12 [See my summary of that.]. Overall Q1 was a poor quarter as semiconductor manufacturers, AMAT's customers, were cautious about investing in new equipment in the face of questionable demand going forward.
The bright spot was the solar energy segment (Energy and Environmental Solutions) which is a relatively new market for Applied Materials. Revenues in the quarter were $122 million, but new orders in the quarter were $260 million.
Management said it was in discussion with 4 major potential purchasers wanting to build solar cell fabrication factories. This $1.9 billion order must be one of those four.
Given that the annual revenue run rate has descended to approximately $8 billion per year, this is a big boost. But what is great is that Applied Materials, even at the low run rate, managed $262 million in net income in the quarter. So its way in the black even in a down cycle.
Applied Materials also has a fair amount of cash, $3.4 billion at the end of the quarter. This despite several fairly recent acquisitions for the solar segment.
I would like to buy Applied Materials, which seemed undervalued to me when I last wrote about it back in November [See Applied Materials Valuation]. On the other hand I have limited cash for investment, and other stocks I would like in my portfolio are also under priced due to the current liquidity crunch.
Even given all this, Applied Materials is a somewhat risky investment due to the uncertain future of the semiconductor manufacturing industry.
Keep diversified.
More data:
www.appliedmaterials.com
My Applied Materials main page.
This comes a few weeks after Applied Material's fiscal Q1 2008 analyst conference of February 12 [See my summary of that.]. Overall Q1 was a poor quarter as semiconductor manufacturers, AMAT's customers, were cautious about investing in new equipment in the face of questionable demand going forward.
The bright spot was the solar energy segment (Energy and Environmental Solutions) which is a relatively new market for Applied Materials. Revenues in the quarter were $122 million, but new orders in the quarter were $260 million.
Management said it was in discussion with 4 major potential purchasers wanting to build solar cell fabrication factories. This $1.9 billion order must be one of those four.
Given that the annual revenue run rate has descended to approximately $8 billion per year, this is a big boost. But what is great is that Applied Materials, even at the low run rate, managed $262 million in net income in the quarter. So its way in the black even in a down cycle.
Applied Materials also has a fair amount of cash, $3.4 billion at the end of the quarter. This despite several fairly recent acquisitions for the solar segment.
I would like to buy Applied Materials, which seemed undervalued to me when I last wrote about it back in November [See Applied Materials Valuation]. On the other hand I have limited cash for investment, and other stocks I would like in my portfolio are also under priced due to the current liquidity crunch.
Even given all this, Applied Materials is a somewhat risky investment due to the uncertain future of the semiconductor manufacturing industry.
Keep diversified.
More data:
www.appliedmaterials.com
My Applied Materials main page.
Tuesday, November 20, 2007
Applied Materials (AMAT) Valuation
Applied Materials, Inc., (AMAT) is a maker of semiconductor fabrication equipment. It has a long history of profitability. This year it is gearing up selling equipment to make solar panels, so it is part of the Green Technology boom. So how should we value its stock?
Unfortunately these are not boom times for silicon equipment manufacturers. Reported results for the fiscal 4th quarter ending October 29, 2007 (See Analyst Conference Summary), included revenues of $2.37 billion that were down 6% from year earlier. It was also a 7.5% slump from the fiscal 3rd quarter.
Net income was roughly down the same, to $422 million.
Still, that shows there is plenty of profit margin built into AMAT's products. Net income was 5.6% of revenues.
Generally, you want to believe that this is just a slow period due to macroeconomic uncertainty. So revenues will go up again. But in this situation you can argue what the P/E (price to earnings) ratio of the stock should be. A wide spectrum is possible.
Today AMAT stock ended at $, giving it a market capitalization of $25.1 billion. Multiply Q4 net income by 4 and you have an annual run rate of $1.69 billion. So the current P/E is 15, and inverting that you get a rate of return on the stock of 6.7%, which is not bad at all. Unless earnings continue to decline; then it would not look so great.
Trailing earnings (the sum of the last 4 reported quarters) are higher than 4 x Q4, so if you want to use that for your annual earnings estimate you get a lower PE and a higher rate of return.
I agree with management that if macroeconomic turmoil increases 2008 could be a rough year. But if people calm down, they will see that demand for electronic devices is booming globally. Many fabs are running at pretty near capacity. So 2008 could also see an increase in equipment orders to keep up with demand and with changing technologies.
When you throw in that Applied Materials has really just gotten started in solar with their SunFab equipment, I think the chances of an improved 2008 are pretty good. The downside risks are relatively low.
That means I believe Applied Materials is undervalued at today's price. On the other hand the stock market is in a funk right now, so you can pick stocks randomly and most will prove to be undervalued.
More data:
Applied Materials Investor Relations page
My Applied Materials (AMAT) page
Unfortunately these are not boom times for silicon equipment manufacturers. Reported results for the fiscal 4th quarter ending October 29, 2007 (See Analyst Conference Summary), included revenues of $2.37 billion that were down 6% from year earlier. It was also a 7.5% slump from the fiscal 3rd quarter.
Net income was roughly down the same, to $422 million.
Still, that shows there is plenty of profit margin built into AMAT's products. Net income was 5.6% of revenues.
Generally, you want to believe that this is just a slow period due to macroeconomic uncertainty. So revenues will go up again. But in this situation you can argue what the P/E (price to earnings) ratio of the stock should be. A wide spectrum is possible.
Today AMAT stock ended at $, giving it a market capitalization of $25.1 billion. Multiply Q4 net income by 4 and you have an annual run rate of $1.69 billion. So the current P/E is 15, and inverting that you get a rate of return on the stock of 6.7%, which is not bad at all. Unless earnings continue to decline; then it would not look so great.
Trailing earnings (the sum of the last 4 reported quarters) are higher than 4 x Q4, so if you want to use that for your annual earnings estimate you get a lower PE and a higher rate of return.
I agree with management that if macroeconomic turmoil increases 2008 could be a rough year. But if people calm down, they will see that demand for electronic devices is booming globally. Many fabs are running at pretty near capacity. So 2008 could also see an increase in equipment orders to keep up with demand and with changing technologies.
When you throw in that Applied Materials has really just gotten started in solar with their SunFab equipment, I think the chances of an improved 2008 are pretty good. The downside risks are relatively low.
That means I believe Applied Materials is undervalued at today's price. On the other hand the stock market is in a funk right now, so you can pick stocks randomly and most will prove to be undervalued.
More data:
Applied Materials Investor Relations page
My Applied Materials (AMAT) page
Wednesday, August 15, 2007
Applied Materials and Technology Business Insights
Applied Materials (AMAT) reported its results for the quarter ending July 29, 2007 (their 3rd quarter fiscal 2007) yesterday. With revenues essentially flat both sequentially and year-over-year, this is not a company that investors are likely to get excited about at the moment.
Yet if you are investing in technology stocks Applied Materials is an important company to watch for insights into technology and its economics. Applied Materials is one of a small group of companies that makes a broad range of equipment for manufacturing semiconductor circuits. In the July quarter revenues were $2.56 billion. KLA Tencor (KLAC) is a competitor with $736 million in revenues last quarter; companies like Samsung and IBM make semiconductor equipment, but that is a relatively small part of their overall business; and there are a variety of smaller specialty competitors. It is reasonable to look at Applied Materials as a single-company proxy for the industry.
With Cisco reporting strong growth in the router and switch market I have to wonder if the slump we have seen this last year in revenues at semiconductor chip companies is hiding a trend towards stronger long-term growth. Cisco believes the transition to Internet telephony and video-over Internet are propelling its growth. Internet trunk line capacity was overbuilt in the late 1990's, but now we are seeing fiber optic cable being run all the way into people's homes. Certainly the bandwidth requirements of video are far higher than those of text and picture Web pages.
You might think that Applied Materials would be seeing demand for new semiconductor manufacturing equipment leading demand for chips, but that is not the case so far. Chip makers, including the increasingly important companies that run fabs for fabless and fab-light chip companies, are buying as slowly as possible. The only area where demand was characterized by Applied Materials as good was RAM or memory production. The increased use of memory in cell phones and other devices is a clear trend people are willing to bet on; no one wants to risk losing a supply contract with a cell-phone maker because they did not buy enough equipment six months ago to get it up and running and ready for next-month's demand.
But in non-memory silicon their has been caution. Demand hit 95% of capacity in 2006, then slumped, and is not back up to 95% quite yet. Discussions with customers indicate that, whereas a few years ago hitting 85% of capacity was a signal to start expanding plant, today manufacturers are delaying their costs by waiting until the 95% mark is reached.
In flat-panel display manufacturing Applied Materials management believes they are in the bottom of a short-term cycle that should end soon. In contrast to chip manufacturers, display manufacturers bought a lot of equipment in 2005-2006 and still have reasonable capacity. However, consumer demand for flat panels is exploding as prices fall, so soon more manufacturing capacity will be needed.
Applied Materials is also into creating the equipment to make both traditional solar cells and the new thin film cells; revenues in the area are growing and should be a larger percentage of revenues in 2008.
Another trend to not is the shift from 200 mm silicon wafers to 300 mm. Much is still done with 200 mm wafers, but Applied Materials believes the cost advantages of 300 mm are such that in the 2008 - 2009 time frame 200 mm wafers will no longer be cost-competitive, so those who have delayed shifting will have to buy 300 mm equipment.
You can tweek your models however you like, but no one is sure when video demand is going to help anyone much besides Cisco. Older personal computers don't do a good job with video; there are always people who (wisely) change computers only when they get a major performance benefit out of doing so. High-end cell phones are becoming more popular, driving demand for low-energy, high-capacity digital and analog chips. Increases in overall demand will show up eventually in semiconductor equipment maker revenues. Macroeconomics aside, I expect demand to be healthy as display screen sizes, memory requirments, and processing capacity for video all continue to attract end consumers (including businesses who want to save money by using telepresence technology).
More Data:
My summary of the Applied Materials analyst conference (August 14, 2007)
Applied Materials home page
KLA-Tencor home page
Yet if you are investing in technology stocks Applied Materials is an important company to watch for insights into technology and its economics. Applied Materials is one of a small group of companies that makes a broad range of equipment for manufacturing semiconductor circuits. In the July quarter revenues were $2.56 billion. KLA Tencor (KLAC) is a competitor with $736 million in revenues last quarter; companies like Samsung and IBM make semiconductor equipment, but that is a relatively small part of their overall business; and there are a variety of smaller specialty competitors. It is reasonable to look at Applied Materials as a single-company proxy for the industry.
With Cisco reporting strong growth in the router and switch market I have to wonder if the slump we have seen this last year in revenues at semiconductor chip companies is hiding a trend towards stronger long-term growth. Cisco believes the transition to Internet telephony and video-over Internet are propelling its growth. Internet trunk line capacity was overbuilt in the late 1990's, but now we are seeing fiber optic cable being run all the way into people's homes. Certainly the bandwidth requirements of video are far higher than those of text and picture Web pages.
You might think that Applied Materials would be seeing demand for new semiconductor manufacturing equipment leading demand for chips, but that is not the case so far. Chip makers, including the increasingly important companies that run fabs for fabless and fab-light chip companies, are buying as slowly as possible. The only area where demand was characterized by Applied Materials as good was RAM or memory production. The increased use of memory in cell phones and other devices is a clear trend people are willing to bet on; no one wants to risk losing a supply contract with a cell-phone maker because they did not buy enough equipment six months ago to get it up and running and ready for next-month's demand.
But in non-memory silicon their has been caution. Demand hit 95% of capacity in 2006, then slumped, and is not back up to 95% quite yet. Discussions with customers indicate that, whereas a few years ago hitting 85% of capacity was a signal to start expanding plant, today manufacturers are delaying their costs by waiting until the 95% mark is reached.
In flat-panel display manufacturing Applied Materials management believes they are in the bottom of a short-term cycle that should end soon. In contrast to chip manufacturers, display manufacturers bought a lot of equipment in 2005-2006 and still have reasonable capacity. However, consumer demand for flat panels is exploding as prices fall, so soon more manufacturing capacity will be needed.
Applied Materials is also into creating the equipment to make both traditional solar cells and the new thin film cells; revenues in the area are growing and should be a larger percentage of revenues in 2008.
Another trend to not is the shift from 200 mm silicon wafers to 300 mm. Much is still done with 200 mm wafers, but Applied Materials believes the cost advantages of 300 mm are such that in the 2008 - 2009 time frame 200 mm wafers will no longer be cost-competitive, so those who have delayed shifting will have to buy 300 mm equipment.
You can tweek your models however you like, but no one is sure when video demand is going to help anyone much besides Cisco. Older personal computers don't do a good job with video; there are always people who (wisely) change computers only when they get a major performance benefit out of doing so. High-end cell phones are becoming more popular, driving demand for low-energy, high-capacity digital and analog chips. Increases in overall demand will show up eventually in semiconductor equipment maker revenues. Macroeconomics aside, I expect demand to be healthy as display screen sizes, memory requirments, and processing capacity for video all continue to attract end consumers (including businesses who want to save money by using telepresence technology).
More Data:
My summary of the Applied Materials analyst conference (August 14, 2007)
Applied Materials home page
KLA-Tencor home page
Tuesday, March 13, 2007
Applied Materials (AMAT) Slowdown
Applied Materials (AMAT) makes the equipment that makes electronic semiconductor devices (chips). In a sense they compete in the most basic industry of the modern electronics industry.
In AMAT’s last analyst conference they reported a 10% sequential decrease in quarterly revenues for the quarter ending January 28, 2007, but they were still up 23% from the quarter ending January 28, 2006. Asked to explain themselves, they said the main factor causing the sequential decline was decreased spending by display manufacturers. A seasonal slowdown in demand for chips also meant that semiconductor manufacturers were able to slow the pace of equipment purchases.
That makes sense given reports from the rest of the electronics industry. While large flat-panel displays are becoming commodity items, partly this was due to remarkable price reductions going into the holiday season of 2006. This cut into profit margins at retailers like Walmart, Best Buy and Circuit City; it also cut into the margins of the manufacturers of the displays, from high-end players like Sony to low-end players that are running full tilt trying to gain market share in this booming market. If margins are low one elective expense to cut back on is production machinery. Since demand is expanding it is not a matter of purchases of machinery going to zero. Instead excess capacity is minimized and machines are purchased only when they are really needed to meet new demand.
The same basic scenario is true of semiconductor makers. In the spring of 2006 there looked like there might be supply constraints. The people who put the chips into the boards that go in everything from cell phones to toys beefed up their inventories rather than risking being unable to meet demand in the holiday season. But then with the holiday build finished, they looked at 2007. The outlook was unclear. Even with demand good they were able to cut inventories. This meant chip manufacturer’s inventories started climbing (some more than others). So no need to purchase machines to make more chips. Again, it is not that demand went to zero. If you look at their capital budgets they kept spending; at their analyst conferences they all gave numbers for further capital spending in 2007 (which analysts use to try to predict the future for firms like Applied Materials).
A key to understanding the chip equipment makers is the transition question. Right now the leading edge is getting ready to change from the 65 nm process to the 45 nm process. But most cutting edge firms, like AMD, are still transitioning production to 65 nm. Many chips are still produced on older processes like 90 nm or larger (nm is nanometer; less nanometers mean smaller chips or more circuits on the same sized chip). Equipment makers are constantly getting ready for the next big thing, selling the cutting edge stuff, and continuing to sell the less expensive older machines. Older machines get sold off to foundries that make low-end chips.
What are the general categories of equipment that AMAT makes? Deposition processes add a thin, sometimes single-atom, layer to a substrate. Planarization makes silicon perfectly flat. Etching removes unwanted materials to create a circuit pattern. Inspection and measurement systems assure quality throughout the fabrication process. Ion implanting changes the electrical characteristics of a substrate. Thermal processes are used to change physical and electrical properties of substances and for some deposition processes. Cleaning equipment is needed to assure perfect inputs to the various other fabrication processes.
One of AMAT’s competitors is Varian Semiconductor (VSEA), which sold about $794 million in equipment in 2006. Its stock price is today over $50 per share, almost double what it was a year ago. Varian specializes in ion deposition.
AMAT sold $9.1 billion of equipment in 2006 and had profits of over $1.7 billion or $1.17 per share. Even with the Q4 sequential decrease they made $403 million in net profit.
AMAT can continue to grow as the semiconductor industry grows. With a price to earnings ratio of 15.75, or a 6.35% earnings return if you buy at today’s stock price, it is a pretty safe bet. It also yields over 1% in dividends.
With upside potential driven at base by growing demand for electronic goods in developing nations, the only downside risk in the short-to medium run for AMAT would be a global recession. Around April the consumer electronics manufacturers will need to place their bets. They will try to predict demand just right, balancing the risk of not having enough product with the risk of overestimating demand. Those decisions will be passed down the chain to chip makers and eventually to chip equipment makers like AMAT.
In AMAT’s last analyst conference they reported a 10% sequential decrease in quarterly revenues for the quarter ending January 28, 2007, but they were still up 23% from the quarter ending January 28, 2006. Asked to explain themselves, they said the main factor causing the sequential decline was decreased spending by display manufacturers. A seasonal slowdown in demand for chips also meant that semiconductor manufacturers were able to slow the pace of equipment purchases.
That makes sense given reports from the rest of the electronics industry. While large flat-panel displays are becoming commodity items, partly this was due to remarkable price reductions going into the holiday season of 2006. This cut into profit margins at retailers like Walmart, Best Buy and Circuit City; it also cut into the margins of the manufacturers of the displays, from high-end players like Sony to low-end players that are running full tilt trying to gain market share in this booming market. If margins are low one elective expense to cut back on is production machinery. Since demand is expanding it is not a matter of purchases of machinery going to zero. Instead excess capacity is minimized and machines are purchased only when they are really needed to meet new demand.
The same basic scenario is true of semiconductor makers. In the spring of 2006 there looked like there might be supply constraints. The people who put the chips into the boards that go in everything from cell phones to toys beefed up their inventories rather than risking being unable to meet demand in the holiday season. But then with the holiday build finished, they looked at 2007. The outlook was unclear. Even with demand good they were able to cut inventories. This meant chip manufacturer’s inventories started climbing (some more than others). So no need to purchase machines to make more chips. Again, it is not that demand went to zero. If you look at their capital budgets they kept spending; at their analyst conferences they all gave numbers for further capital spending in 2007 (which analysts use to try to predict the future for firms like Applied Materials).
A key to understanding the chip equipment makers is the transition question. Right now the leading edge is getting ready to change from the 65 nm process to the 45 nm process. But most cutting edge firms, like AMD, are still transitioning production to 65 nm. Many chips are still produced on older processes like 90 nm or larger (nm is nanometer; less nanometers mean smaller chips or more circuits on the same sized chip). Equipment makers are constantly getting ready for the next big thing, selling the cutting edge stuff, and continuing to sell the less expensive older machines. Older machines get sold off to foundries that make low-end chips.
What are the general categories of equipment that AMAT makes? Deposition processes add a thin, sometimes single-atom, layer to a substrate. Planarization makes silicon perfectly flat. Etching removes unwanted materials to create a circuit pattern. Inspection and measurement systems assure quality throughout the fabrication process. Ion implanting changes the electrical characteristics of a substrate. Thermal processes are used to change physical and electrical properties of substances and for some deposition processes. Cleaning equipment is needed to assure perfect inputs to the various other fabrication processes.
One of AMAT’s competitors is Varian Semiconductor (VSEA), which sold about $794 million in equipment in 2006. Its stock price is today over $50 per share, almost double what it was a year ago. Varian specializes in ion deposition.
AMAT sold $9.1 billion of equipment in 2006 and had profits of over $1.7 billion or $1.17 per share. Even with the Q4 sequential decrease they made $403 million in net profit.
AMAT can continue to grow as the semiconductor industry grows. With a price to earnings ratio of 15.75, or a 6.35% earnings return if you buy at today’s stock price, it is a pretty safe bet. It also yields over 1% in dividends.
With upside potential driven at base by growing demand for electronic goods in developing nations, the only downside risk in the short-to medium run for AMAT would be a global recession. Around April the consumer electronics manufacturers will need to place their bets. They will try to predict demand just right, balancing the risk of not having enough product with the risk of overestimating demand. Those decisions will be passed down the chain to chip makers and eventually to chip equipment makers like AMAT.
Wednesday, February 14, 2007
Applied Materials on 45 nm
Intel, locked in a battle-to-the-death with AMD, recently announced it had won the 45 nm war. Within hours the same day IBM announced that Intel's accomplishments, even if real, were no big deal because IBM has the same capabilities. That is good for AMD, which is partnering with IBM.
45nm means that semiconductors are constructed on a grid with cells 45 nanometers wide. Right now the most advanced silicon actually being sold is 65 nm, which Intel started selling mid-2006 and AMD started selling in January 2007. Smaller sizes mean more gates and computing power in a given area. You can, of course, waste those extra gates with a bad design.
Applied Materials executives, in the February 13th analyst conference (see my summary), gave their perspective on the transition to 45nm. They make much of the equipment used in fabrication plants to make semiconductors. They sell that equipment to just about everyone, including AMD, Intel, and IBM. They should know a thing or two about it.
They claim to have the best process. Whatever process they have they will license to anyone who will pay for it. They have worked with both IBM and Intel on the issue.
What does this mean for investors? It probably means 45 nm won't be an issue. One company or another might get an edge, but that is unpredictable right now and won't be the main determining variable. Every time process size shrinks there is a lot of handwringing; some day further shrinking either will be prohibitively expensive or just won't work.
Winners will be those who use 45 nm most effectively and are most effective at marketing. Intel is the long-reigning champion, but looks punch drunk and ready to fall. Intel fired thousands of engineers last year while AMD was hiring.
Meanwhile consumers benefit from the intense price competition. Short term investors probably want to avoid Intel and AMD, despite historically low stock prices. Long term, any letting up in the price wars will mean big bounces for both the companies.
45nm means that semiconductors are constructed on a grid with cells 45 nanometers wide. Right now the most advanced silicon actually being sold is 65 nm, which Intel started selling mid-2006 and AMD started selling in January 2007. Smaller sizes mean more gates and computing power in a given area. You can, of course, waste those extra gates with a bad design.
Applied Materials executives, in the February 13th analyst conference (see my summary), gave their perspective on the transition to 45nm. They make much of the equipment used in fabrication plants to make semiconductors. They sell that equipment to just about everyone, including AMD, Intel, and IBM. They should know a thing or two about it.
They claim to have the best process. Whatever process they have they will license to anyone who will pay for it. They have worked with both IBM and Intel on the issue.
What does this mean for investors? It probably means 45 nm won't be an issue. One company or another might get an edge, but that is unpredictable right now and won't be the main determining variable. Every time process size shrinks there is a lot of handwringing; some day further shrinking either will be prohibitively expensive or just won't work.
Winners will be those who use 45 nm most effectively and are most effective at marketing. Intel is the long-reigning champion, but looks punch drunk and ready to fall. Intel fired thousands of engineers last year while AMD was hiring.
Meanwhile consumers benefit from the intense price competition. Short term investors probably want to avoid Intel and AMD, despite historically low stock prices. Long term, any letting up in the price wars will mean big bounces for both the companies.
Applied Materials on 45 nm
Intel, locked in a battle-to-the-death with AMD, recently announced it had won the 45 nm war. Within hours the same day IBM announced that Intel's accomplishments, even if real, were no big deal because IBM has the same capabilities. That is good for AMD, which is partnering with IBM.
45nm means that semiconductors are constructed on a grid with cells 45 nanometers wide. Right now the most advanced silicon actually being sold is 65 nm, which Intel started selling mid-2006 and AMD started selling in January 2007. Smaller sizes mean more gates and computing power in a given area. You can, of course, waste those extra gates with a bad design.
Applied Materials executives, in the February 13th analyst conference (see my summary), which makes equipment that any (with billions of dollars) can buy to create a semiconductor fabrication plant, said they are well-prepared for 45nm and have done their own research.
All this says that 45nm processes are mainly a red herring. One process may be better than the other on one parameter or another, but any company wanting to move into 45 nm production will be able to license the technology.
Intel is much better at announcing that it has won battles before they have begun, and at taking out ads in publications that actually review products, than it is at putting out products designed to meet its customers needs. No wonder people continue to shift to AMD processors.
45nm means that semiconductors are constructed on a grid with cells 45 nanometers wide. Right now the most advanced silicon actually being sold is 65 nm, which Intel started selling mid-2006 and AMD started selling in January 2007. Smaller sizes mean more gates and computing power in a given area. You can, of course, waste those extra gates with a bad design.
Applied Materials executives, in the February 13th analyst conference (see my summary), which makes equipment that any (with billions of dollars) can buy to create a semiconductor fabrication plant, said they are well-prepared for 45nm and have done their own research.
All this says that 45nm processes are mainly a red herring. One process may be better than the other on one parameter or another, but any company wanting to move into 45 nm production will be able to license the technology.
Intel is much better at announcing that it has won battles before they have begun, and at taking out ads in publications that actually review products, than it is at putting out products designed to meet its customers needs. No wonder people continue to shift to AMD processors.
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