TIME TO TAKE A CHANCE ON APPLIED MATERIALS
By Amey Stone
Associate Editor, Business Week Online
businessweek.com;
You'll often do pretty well as a stock investor if you buy and hold industry leaders, such as the ones that earn a spot in the Business Week 50. You'll do even better if you snap them up when their stock price is cheap through no fault of their own.
Of the 15 companies in the S&P 500 that meet our three most important investing criteria -- improving margins, high return on invested capital, and being top-ranked in their industry -- Applied Materials (AMAT), the leading semiconductor equipment maker, may be the best buy right now. It is the clear leader in its industry, both in sales and breadth of product. "They also have a depth of technology that is industry-leading," says analyst Sue Billat of BancAmerica Robertson Stephens. Business Week ranks the company No. 13 of all the companies in the S&P 500 based on our exclusive list of performance measures.
As for that cheap stock price that isn't its fault, Applied Materials happens to be in a notoriously cyclical business that has been going through tough times. Asia is the main culprit, but recent sluggishness in the personal computer business hasn't helped. With chipmakers' capacity outpacing demand, they have little current need for more production equipment and have slashed spending on the kind of gear Applied makes.
The pendulum may soon swing back, however. Several prominent analysts believe that the biggest cuts in spending on equipment have been factored into Applied already. And even the most beleaguered chipmakers need new technology to remain competitive. So Elliot Rogers of Deutsche Morgan Grenfell, who is forecasting a 12% reduction in semiconductor capital spending this year, thinks "that sets things up for tightening capacity next year and a renewed investment cycle." Momentum will really start building again in 1999 and 2000, he predicts.
If that happens, the company will be ready. "They're a 1,000-pound gorilla in a 10-pound cage," says Rogers. Applied Materials had $4 billion in sales in 1997, about four times that of its nearest domestic competitor. It has increased spending on research and development and customer service, which is allowing Applied to steal market share, even in the downturn, Rogers says.
As industry conditions and Applied's margins improve, Jay Deahna of Morgan Stanley feels the stock could trade as high as 55 a year from now. "I think that the stock, relative to the long-term earnings potential, is very attractive," he adds. Even if there's more bad news, he doesn't think the stock will trade much below 30. That, he argues, adds up to a pretty attractive risk/reward scenario. With Asia's economic crisis, overcapacity in memory chips, and squishy demand for PCs, Applied has already fallen considerably from its Aug. 20 high of 54 3/16. It closed on Mar. 19 at 33 7/8, having bounced from a recent low of 26 1/8 on Dec. 12.
Of course, says Billat, "you can bounce around the bottom for quite awhile." Still, Applied Materials is the only stock she recommends out of the 11 semiconductor equipment makers she follows. "Even in the worst of times, it has managed a strong business," she says.
It's true that if Asia's economic problems prove worse than expected, all bets are off. Applied did just over half of its $1.31 billion in sales in its fiscal first quarter in Asia. Most of that was in Taiwan, where business is holding up fairly well. Only a fraction was in Indonesia, probably the most troubled Asian economy at the moment. But in the Feb. 10 announcement of those results, company Chairman James Morgan warned that he's concerned about the economic health of Korea and Japan, and that he expects "lower new orders and less favorable operating results than we originally anticipated as we entered fiscal 1998."
So, Asia is still a wild card. But if you like the idea of buying a premier high-tech company when it may be in the bottom of a cyclical downturn, Applied Materials may be worth the risk. |
