Headline: Applied Materials: Reiterating Our 1 (Buy) Rating; Estimates Cut
Author: Edward C. White, Jr., CFA 1(212)526-4744
Rating: 1
Company: AMAT
Country: COM CUS
Industry: ELECTS
Ticker : AMAT Rank(Prev): 1-Buy Rank(Curr): 1-Buy
Price : $28 1/8 52wk Range: $54-17 Price Target: $50
Today's Date : 12/19/97 Selected Growth Stock List
Fiscal Year : OCT
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EPS 1997 1998 1999 - -
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.24A 0.47E 0.47E 0.63E 0.50E - -
2nd: 0.27A 0.49E 0.46E 0.65E 0.58E - -
3rd: 0.38A 0.51E 0.40E 0.67E 0.67E - -
4th: 0.49A 0.53E 0.42E 0.70E 0.75E - -
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Year:$ 1.38A $ 2.00E $ 1.75E $ 2.65E $ 2.50E $ - $ -
Street Est.: $ 2.14E $ 2.02E $ 2.56E $ 2.49E $ - - $ - -
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Price (As of 12/17): $28 Revenue (1997): 4.1 Bil.
Return On Equity (97): 20.9 % Proj. 5yr EPS Grth: 25.0 %
Shares Outstanding: 382.8 Mil. Dividend Yield: Nil
Mkt Capitalization: 10.90 Bil. P/E 1998; 1999 : 16.0 X; 11.2 X
Current Book Value: $7.69 /sh Convertible: None
Debt-to-Capital: 13.6 % Disclosure(s): C, A
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* We have refocused our investment ratings in the semiconductor equipment
group and lowered our ratings on several companies. However, we are
reiterating our 1 (Buy) rating on Applied Materials' shares.
* The worsening situation in Asia is likely to affect all of the semiconductor
equipment companies. To account for a potential impact we are reducing our FY
1998 EPS estimate on Applied Materials to $1.75 per share from $2.00.
* We believe there will be a dramatic shift towards equipment capable of
working at or below 0.25 microns, enabling chip manufacturers to lower costs.
Applied has the industry's most complete range of 0.25 micron systems.
* Moreover, 1998 could be a big market share year for Applied Materials. The
company takes advantage of slow business climates. We think expanded share of
existing markets and entry into new ones are likely developments at Applied.
* We are reducing our one-year price target to $50 from $63. The shares have
not returned to historically low valuations (measured by price/sales and
price/book), but they are down a lot from their high points a few months ago.
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BUSINESS DESCRIPTION: A global growth company, the largest company in the
world dedicated solely to the manufacture of semiconductor production
equipment. Products: Etchers, CVD, PVD, epi reactors, ion implanters.
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We have reassessed of semiconductor equipment ratings. In general, we are
concerned about the worsening financial situation in Asia, and the potential
ripple effect on companies in the United States. South Korean semiconductor
manufacturers are deferring orders for all types of equipment.
While semiconductor equipment demand outside of South Korea, Malaysia and
Thailand does not appear to have been affected by the Asian crisis so far, the
degree to which the situation could spread, and the potential impact of Asian
developments on worldwide electronics demand, remain uncertain.
Accordingly, we have lowered our investment ratings on a number of
semiconductor equipment companies. Applied Materials is one of the few which
we continue to rate 1 (Buy), and we are reiterating our recommendation to
purchase the shares.
Applied Materials has a proven ability to outperform in tough climates. In
the 1996-1997 downturn in the equipment industry, which was characterized by
sharp memory price declines and cutbacks in capital investment, Applied
Materials was able to hold revenues steady, and maintain above a 10% net after
tax margin. While earnings per share fell, the initial expectations for
Applied during the downcycle were far worse that what actually materialized.
We think the primary reason is that the company was able to capitalize on its
strong base of advanced generation tools, which remained relatively popular
during the last downturn. Applied Materials is a cyclical company, but in
each downcycle its performance appears to be getting better.
Potential beneficiary of the a move to cut chip manufacturing costs. Memory
prices are under pressure. Microprocessor prices are under pressure. Chip
manufacturers worldwide are likely to respond to these pressures by doing all
they can to reduce their manufacturing costs. One of the most effective ways
of doing this is to increase the wafer size. But with raw 12 wafers costing
over $1000 each, and with limited 12 equipment availability, this will not be
a viable alternative (for volume production) for two more years. The other
alternative is to move to 0.25 micron production, and then either shrink the
physical chip itself (and put more on a wafer, to increase total output for
essentially the same cost), or to put more features and functionality onto the
same sized chip. The key is to move to 0.25 micron production while
maximizing productivity and minimizing cost of equipment ownership. Applied
Materials' product offerings are designed to work at the leading edge of
technology (0.25 microns and lower) without sacrificing manufacturing
productivity, or incurring excessive cost. We think this can help the company
outperform many of its industry peers, even in a difficult business climate.
But Applied is not be immune to Asia. As a global semiconductor equipment
supplier, Applied Materials has a large presence with major chip manufacturers
throughout Asia, including Japan, South Korea, Taiwan, Singapore and China.
The diversity of presence in Asia may turn out to be a strength, in that
certain parts of the region, such as China, may escape some of the turmoil
that the other countries are experiencing. Nevertheless, it is necessary to
factor the potential risks more completely into our earnings estimates.
Accordingly, we have reduced our earnings per share estimates to $1.75 for
fiscal 1998 and $2.50 per share for fiscal 1999. Our new estimates are not
motivated by specific management guidance. Rather, they represent our best
assessment of the magnitude of impact that development in Asia will ultimately
have on the company. We are discussing developments that have not yet
occurred, so there is some educated guesswork here.
Basis for our projection. Our revenue projection is loosely based on our
Semiconductor Capital Budget Survey, which tentatively calls for a 3% year-to-year
decline in worldwide semiconductor capital investment in 1998. Into this
assumption we have factored three things: (1) investment in equipment will
grow 10% from the 1997 level, while investment in land and buildings decline;
(2) investment in 0.25 micron equipment will grow 15%, as these systems are
becoming an increasing share of the total number sold as the chip industry
accelerates its technology development cycle; and (3) Applied's revenues
should grow at about 17%, faster than the 0.25 micron industry average, as the
company increases its market share. With stable margins, we think Applied
Materials' earnings per share growth will be more than 25% for the year. |
