The Fischer analysis.For those that missed the article link.
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Author: mlc11
Number: of 2327
Subject: Re: AMAT Fisher Analysis
Date: 9/15/00 5:28 PM
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Recommendations: 23
throgsnk & others,
As promised, an attempt at a 15-pt. Fisher analysis. Please have at it, as I am very new to this field
(as indicated by the semiconductor comment in point 11).
15 Point Fisher analysis of Applied Materials (AMAT)
Prelude:
1. I don't own any shares of AMAT (yet).
2. In pseudo-scuttlebut fashion, the only info taken from AMAT itself are numbers. All other info is
from cited references.
3. All unattributed quotes are from Common Stocks, Uncommon Profits.
4. All bolding is my own.
Here we go:
Point 1 = Does the company have products or services with sufficient market potential
to make a sizeable increase in sales for at least several years?
Not even the most outstanding growth companies need necessarily be expected to show sales
for every single year larger than those of the year before..growth should not be judged on an
annual basis but..by taking units of several years each..Those companies which decade by
decade have consistently shown spectacular growth…
For those who want an overview of AMAT (my exception to #2 above):
Applied Materials Presents at St. Louis Society of Financial Analysts
appliedmaterials.com
From Worth Magazine (10/99):
Applied Materials (Nasdaq: AMAT; recent price, $71) is the
world's leading maker of semiconductor- manufacturing equipment. Or as
company literature has it, "we make the systems that make the chips that
make the products that change the world."
Morgan and Applied Materials are proof that paranoia isn't the only route to
prosperity. Since 1977, when he was promoted to CEO, Morgan has
delivered an average annualized rate of return of 36 percent to his
shareholders (Morgan himself owns 1.8 million shares of Applied Materials,
worth $128 million). That's even better than the 31 percent a year Intel
returned from May 1987 to May 1998, Grove's tenure as CEO.
worth.com
But what about the future?
From Business Week, 8/22/00:
INVESTING Q&A
Holdings for the Long Haul
Where Rosellen Papp of the Papp mutual funds looks for stocks with legs
If you were to buy only one growth stock for the
next five years, it should be Applied Materials, in the
view of Rosellen C. Papp of the Papp mutual funds.
As a partner in L. Roy Papp & Associates, she
looks for low-risk, high-return stocks to hold for the
long term -- and also has definite ideas on areas to
avoid now.
businessweek.com
From TMF Financial Section:
Growth Rates: 1yr - 20.23, 3yr - 5.44, 5yr - 23.96
While many feel that the dreaded cyclical nature of the semiconductor industry will be dampened by
the expansion of chip requirements far beyond the PC, I almost feel like giving AMAT a bonus point
for what will surely be built in buying points:
Point 2 = Does the management have a determination to continue to develop products
or processes that will still further increase total sales potentials when currently attractive
product lines have largely been exploited?
Point 1 is a matter of fact…Point 2 is a matter of management attitude..
Back to the Worth article:
Few semiconductor analysts understand their field as well as Manoj
Nadkarni. The MIT graduate spent 15 years as a process engineer with
Advanced Micro Devices, National Semiconductor, and Matsushita
Semiconductor before launching ChipInvestor.com this spring, a Web site
devoted to providing unbiased research on semiconductor stocks. So when
he holds forth on the chip industry's brightest luminaries, he knows what he's
talking about. "Without a doubt," he says, "the two most inþuential and
important people in the semiconductor business during the past 30 years have
been Andy Grove and Jim Morgan. These two gentlemen, especially
Morgan, are in a league by themselves."
What that premium recognizes is Morgan's uncanny ability to anticipate shifts
in a notoriously unpredictable business. A key instance occurred early in
1979. At a time when nearly all the world's chip making was concentrated in
Silicon Valley, Morgan set up Applied Materials Japan, because he
recognized that Japan was potentially the biggest export market for U.S. chip
makers -- and their biggest rival.
Morgan's move was derided at the time, but earnings at the wholly owned
subsidiary gave a big boost to Applied Materials throughout the 1980s.
From IBD, 6.27.00:
Listening to Employees Keeps His Company Growing
appliedmaterials.com
From Forbes, 4/5/00
Applied Materials: Silicon Phoenix
forbes.com
And here at TMF:
Morgan: We focus very hard on leading in two
categories. One is the rapid introduction of leading
products. Our products are usually number one or two in
virtually all of the submarkets we participate in. We also
have a very broad global distribution system. Fortunately
we lead in each market around the world -- Taiwan,
Korea, China, Southeast Asia, Europe, and the United
States.
Our particular business is driven by what we see as three waves. The first
wave is the move to tighter geometries. Fortunately there's a shortage of
capacity at what we call 0.18 production technology. It's gone from 0.35 to
0.25 to 0.18. The equipment that produces that kind of geometry is becoming a
larger and larger portion of our business. We've invested a couple of billion
dollars in that equipment over the past few years, and since we lead in that
segment, we're gaining share across the board.
TMF: You're actually growing faster than the industry.
Morgan: The team's done just an outstanding job this past couple of years.
That's the first wave and that's what's been driving the current business.
The second wave is the materials transition. This is one of the more significant
material transitions I've seen in years -- to new, improved dielectrics and
conducting materials like copper (as opposed to aluminum). That wave is sort
of starting and is in development lines now.
TMF: What's the performance advantage there?
Morgan: Faster speeds and lower powers. That means you can continue to
follow Moore's Law by reducing the cost per function and therefore expanding
the business.
The third wave is the move to 300 millimeter wafers. We have a broad line of
products for 300 mm and those are just now going into the development labs.
TMF: Explain that a bit.
Morgan: Three hundred millimeter refers to the wafer size. It's like moving from
a salad plate to a dinner plate.... Each of those three waves is a requirement
for new types of equipment.
fool.com
Point 3 = How effective are the company's research and development efforts in relation
to its size?
For the past 20 years R&D as a percent of sales has averaged 15%, and has not dropped below
10% or gone over 20%.
For the $1 premise, I have arbitrarily assumed that it takes 5 years for R&D to translate into net
income.
R&D from 1985-1994: $841.4 million
Net Income from 1990-1999: $2949.9 million
Therefore AMAT has made $3.5 in net income for every $1 put into R&D over these 10-year
periods.
Point 4 = Does the company have an above average sales organization?
Back to the TMF interview:
Morgan: We maintain equipment, manage spare parts,
provide training, and do contract work for customers.
Customers are outsourcing more activities as kind of a trend in the industry,
and we're very fortunate. We have 2,500 people scattered around the world at
the sites where our customers have factories and customers and would like us
to take on more and more of their activities if we do a good job. The services
business is a several-billion-dollar business. Last year, it was about $750 million
for us, but it's over a $1 billion run-rate as we look into the early part of this
year.
From Semiconductor International, 1/00:
Applied CEO Talks About Downturns, Strategy and Partnering
Morgan: The biggest challenge is always to have as much information as the customer does
about
his business outlook. During this last downturn we were able to double our revenues from no
insignificant level to an even larger one. This shows we have tremendous flexibility in our
ability to
manage issues, but better planning enables us to do a better job. Hopefully, our customers
will realize
this even more and work more closely with us.
semiconductor.net
Point 5 = Does the company have worthwhile profit margins?
From TMF news, 11/18/99:
Both gross margins and net margins increased sequentially and year over year. Gross
margins now
stand at 50%, with net margins at a very healthy 19.6%. One reason margins are key to
investors in
this sector is that, as a rule, companies with the best margins are doing the best job
differentiating and
improving products. Companies that can't offer chip makers the latest technology in this
fast-changing
field get left behind.
Operating margins slipped slightly, to 23% from 24%, but are still well above the 15%
threshold that
investors in this industry should look for.
The company also has plenty of working capital, with more than $5 billion in current assets
and just
$1.7 billion in current liabilities. In the event of a downturn, it has the financial strength to
ride out the
storm with nearly $3 billion in cash and short-term investments, and just $2.4 billion in
long-term
liabilities.
For the year, sales grew 20% to $4.86 billion. It's worth noting that the company's growth
rate is a
lot higher than the industry's growth rate, which means it's grabbing market share. It
captured about
21% of the estimated $23 billion semiconductor equipment market in 1999, compared to 18%
last
year, according to data from the Semiconductor Equipment and Materials Industry, a
nonprofit trade
association.
fool.com
From MS Research Wizard:
Company AMAT KLAC NVLS
1 year 21 16.9 19.9
5 year 12.5 12.5 8.5
From Multex.com:
ROE:
Company 95 96 97 98 99 last 12 months
AMAT 33 29 19 8 20 34
KLAC 30 11 12 3 17 18
NVLS 34 29 -28 16 13 20
Point 6 = What is the company doing to maintain or improve profit margins?
From Electronic Business, 12/10/99:
Applied Materials tackles 'spare' issues
Just as Applied Materials Inc. has forged a leading position for itself
on the supply chain, it is now tackling the spare-parts
inventory-management role by making some major service offerings.
The Santa Clara, Calif., company's Installed Base Support Services
Business Group, which services about 11,000 systems in more than
400 fabs worldwide, has designed a suite of solutions to reduce chip
makers' operating costs, increase system efficiency, and reduce
inventory-management expenses, said IBSS president Vinod
Mahendroo.
The umbrella offering, called Total Service Solutions, contains two key
elements: Total Parts Management and Total Support Package.
"Our customers were holding inventory, we were holding inventory,
and our suppliers were holding inventory," Mahendroo said. "There's a
cost associated with holding all that spare- parts inventory, and there
is a risk of obsolescence. By industry standards, it costs 35 cents for
every dollar of inventory that is held."
To alleviate the costs of redundant holdings, IBSS began working with
key suppliers, namely TI, to develop an inventory-management
program similar to other vendor-managed inventory programs that have
cropped up in recent years. And so emerged the basis of TPM.
Point 7 = Does the company have outstanding labor and personnel relations?
Council on Economic Priorities: Minority Advancement-A, Workplace-A, Family Benefits-B,
Women's Advancement-D .
cepnyc.org
Fortune 50 Best Companies for Minorities: 2000-#12, 1999-#29, 1998-#6
fortune.com
From JobCircle.com:
Although Applied Materials
employees generally describe
themselves as "quite well
compensated," salaries don't
seem to be the reason. "Far
from astronomical," describes
one contact when asked about
salary. "The salaries are
average," notes another. Other
forms of compensation,
however, win praise. For
example, new employees
receive stock options that have
"quickly doubled in value," and
also participate in a profit
sharing program that makes up
"about 15 percent" of salaries.
Insiders also "appreciate" the
"excellent medical and dental
benefits." And for those who
want the chance to advance
within the company or
elsewhere, the "superb tuition
reimbursement program" gives
them the chance.
jobcircle.com
Point 8 = Does the company have outstanding executive relations?
Point 9 = Does the company have depth to its management?
From Mercury Center:
Passing the torch
New leadership in the wings at semiconductor
equipment makers
BY THERESE POLETTI
Mercury News
Applied is known for its internal grooming of executives -- the company even has a
``university' for training employees, including younger managers. ``Our plan is to
develop the next generation because at some point we have to have them pick up the
load,' said Chairman and Chief Executive Jim Morgan.
But the world's largest equipment maker refuses to discuss who might take the reins
from Morgan, 61, when he eventually decides to retire.
Many analysts speculate that Applied will promote an executive in Applied's office of
the president, which is made up of four executives: Dan Maydan, 64, president; David
N.K. Wang, 53, senior vice president; Sasson Somekh, 54, senior vice president; and
Joe Bronson, 53, senior vice president and chief financial officer.
Bronson is a fixture on Applied's quarterly conference calls, and Somekh has recently
been participating as well. Somekh will also co-host a news conference with Morgan
today, where Applied will announce 21 new products for making chips using
300-millimeter technology, which will enable chip makers to get more chips with finer
line widths out of larger silicon wafers.
``They are trying to raise his visibility,' said Min Pang, an analyst with SG Cowen &
Co. ``Clearly, the big thing is he was made a member of the office of the president. In
that role, he is probably responsible for business development in a much broader
sense.'
Industry executives and analysts said Applied is particularly prickly about discussing
its succession plans because of infighting and internal politics at the 16,000-employee
company. The company has also lost several promising executives to competitors.
mercurycenter.com
Looks like we need to dock a point for executive relations :(
Point 10 = How good are the company's cost analysis and accounting controls?
They're fine. Even Fisher feels that this doesn't really need to be covered in depth, if the other points
are working out OK.
Point 11 = Are there aspects of the business, somewhat peculiar to the Industry
involved, which will give the investor important clues as to how outstanding the
company may be in relation to its competition?
Before I got into this analysis, I thought that a semiconductor was someone who worked at a
truckstop :)
For those of you who would like an awesome visual aid, please check this out:
Fortune, 4/00, How a Wafer Becomes a Chip
forbes.com
The technology can be broken down into 10 categories; () indicate % of market & rank of AMAT:
Chemical Vapor Deposition (55,1), Physical Vapor Deposition(82,1), Epitaxial Deposition (27,2),
Plasma (Dry) Etch (38,1), Rapid Thermal Processing (69,1), Chemical Mechanical Polishing (57,1),
Ion Implantation(17,3), CD-SEM (10,3), Automatic Defect Review and Classification (41,1), and
Electroplating (AMAT entered this market in 1999).
From Electronic Business, 11/97:
COVER STORY: SPECIAL REPORT
Applying pressure
Applied Materials dominates the IC capital equipment
business but CEO James Morgan isn't about to stop
there. That really irritates the competition
eb-mag.com
Point 12 = Does the company have a short range or long range outlook in regards to
profits?
From IBD, 6/24/99: Chip Industry's Shift to Big Wafers: Pain, Then Gain
appliedmaterials.com
Please correct me if you disagree, but I would think that earnings surprises (positive) would be a
reasonable surrogate for this type of evaluation. From MS Wizard:
moneycentral.msn.com
Positive "surprises" almost every time (from 3-20% above expectations).
Also, I think this is fairly well covered in Point #2 discussion.
Point 13 = In the foreseeable future will the growth of the company require sufficient
equity financing so that the larger number of shares then outstanding will largely cancel
the existing shareholders' benefit from this anticipated growth?
Debt/Equity has been below 0.2 for the past 55 years, and currently is 0.09.
Point 14 = Does the management talk freely to investors about its affairs when things
are going well but "clam up" when troubles and disappointments occur?
From TMF News, 8/18/1999:
Applied Materials Gets Thumped
By Brian Graney (TMF Panic)
August 18, 1999
Adding to the disappointment, management told analysts on a conference call yesterday that
it sees
bookings undergoing "a plateau effect" that could last for the next one or two quarters.
And TMF Panic ended:
With the longer-term outlook still bright, investors should be on the lookout
for those moments when the short-term infatuated Mr. Market offers opportunities to take
advantage
of the growth to come.
Point 15 = Does the company have management of unquestionable integrity?
From Electronic Business - 4000 Senior Execs in Electronics Industry respond to: "If
you had to trust all your personal assets and finances to only 2 CEOs, who would
they be..":
e-insite.net
Only 6 CEOs received more than 10% of the votes, and James Morgan was one of them.
From Worth, 5/00: The Best CEOs
#5: James Morgan
MANAGEMENT STYLE: Reflective. Employees are encouraged to
spend 5 percent of their time envisioning the future. "We look at a five-year
vision to make sure general strategy is okay, then we run a three-year financial
plan, then every 90 days we look at our organization pretty thoroughly."
CORPORATE GOAL: "We have developed three
values: Stay close to the customer. Show mutual trust and respect--because we
have a very diverse employee base. And achieve world-class performance."
So there you have it. By my count AMAT scores 14/15 (not including the bonus point for being in a
cyclical industry).
This is my first Fisher analysis, and I'd very much appreciate any and all constructive criticism.
There's no hurry as we won't get to Fisher's When to Buy chapter for a few more weeks.
Thanks for reading,
Mark
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