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Politics : Formerly About Applied Materials

AMAT 216.66

-3.0%

9:45 AM EST

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To: Katherine Derbyshire who wrote (28084)	2/8/1999 7:37:00 PM
From: Ramsey Su	Read Replies (5) of 70976

Katherine, gone for most of Jan, returning to find the bull run in the semi eq sector. Today is the final straw with ML and Morgan jumping on the bandwagon. I generally have no opinion of the analysts but the recent shameless promotions deserves a response. AMAT is not alone. It seems like most of the threads that I follow on SI have totally abandoned fundamental analysis. I updated my data this weekend and cannot believe the current valuation of AMAT. First of all, the best year ever for AMAT was FY96 (oct) when they had $4,145 million rev and $1.63 earnings. Zacks is estimating earnings of $.64 for FY 99 and $1.63 for FY2000. Let us ignore FY99 as the correction yr and move on to FY2000. $1.63 earnings give us a PE of of over 41 based on today's price. That is a whole yr and a half away. By the way, the average PE for the last 5 yr was 21.1 with an estimated 5 yr growth rate of 23.2. Let us be wildly optimistic and assume that all analysts are wrong. AMAT will make $3 per share and bring in revenue of $10 billion for FY2000. That would still be almost a 23 PE based on today's price. What type of semi capacity would the industry have if so much money is spent on semi equipment? We may be looking at the mother of all gluts. In the mean time, it appears that there is a divergence between the semi and the semi eq companies. The semi eq companies would love to design and sell new eq for every cycle. The semi companies, on the other hand, are figuring out ways to reuse and extend the economic life of some very expensive cap expenditures. As an example, MOT was obviously working in that direction with their .1 micron, which I did not see mentioned on this thread. Business for this sector is so poor right now that I have no doubt it will improve. What amaze me is no one questions how far into the future have already been factored into today's price. Someone opined that AMAT will be $100 soon. Lets work backwards and see what they should imply. Giving it a 25 PE, earnings would have to be $4 with revenue way above the $10 billion range. How many new fabs would have to be under constructions and how big a backlog is needed to maintain this level of revenue? What would have to happen in the semi world to create this level of demand for fabs? Fortunately, gut feeling is a lot more important than fundamentals these days. I think I will borrow from my credit card and buy some more AMAT tomorrow. Ramsey

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