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
Showing posts with label solar technology. Show all posts
Showing posts with label solar technology. Show all posts
Monday, April 22, 2013
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/
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.
Thursday, September 3, 2009
Applied Materials Under the Hood
Applied Materials makes capital equipment, which is equipment used to manufacturer further equipment or goods. In Applied Materials' case it manufactures the machines used to make semiconductors and related electronic equipment. It has four major segments: semiconductor; display; solar; and services.
Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.
Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.
So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.
While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.
When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.
The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.
Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.
In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.
Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.
Applied Materials is predicting to at least break even on a GAAP basis in Q3.
The usual business risks from competition and shifting demand patterns remain present.
So keep diversified!
Applied Materials main page
Applied Materials Investor Relations page
Openicon Applied Materials main page
Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.
Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.
So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.
While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.
When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.
The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.
Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.
In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.
Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.
Applied Materials is predicting to at least break even on a GAAP basis in Q3.
The usual business risks from competition and shifting demand patterns remain present.
So keep diversified!
Applied Materials main page
Applied Materials Investor Relations page
Openicon Applied Materials main page
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
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