I2: Since there is so much interest in AMAT on this thread, here is something to read that I do not believe has been posted on the AMAT thread (this is very interesting on itself) which seems to be in a buying feeding frenzy over the possibility of AMAT falling apart on Monday:
Headline: Applied Materials: Added To Ten Uncommon Values List Author: Edward C. White, Jr., CFA 1(212)526-4744 Rating: 1 Company: AMAT Country: COM CUS Industry: SEMICO Ticker : AMAT Rank(Old): 1-Buy Rank(New): 1-Buy Price : $29 1/2 52wk Range: $54-26 Price Target (Old): $50 Today's Date : 07/01/98 Price Target (New): $50 Fiscal Year : OCT ------------------------------------------------------------------------------ EPS 1997 1998 1999 2000 QTR. Actual Old New Old New Old New 1st: 0.24A 0.52A 0.52A 0.35E 0.35E - -E - -E 2nd: 0.27A 0.37A 0.37A 0.45E 0.45E - -E - -E 3rd: 0.38A 0.20E 0.20E 0.65E 0.65E - -E - -E 4th: 0.49A 0.21E 0.21E 0.80E 0.80E - -E - -E ------------------------------------------------------------------------------ Year:$ 1.38A $ 1.30E $ 1.30E $ 2.25E $ 2.25E $ - -E $ - -E Street Est.: $ 1.34E $ 1.33E $ 1.53E $ 1.52E $ - -E $ - -E ------------------------------------------------------------------------------ Price (As of 6/30): $29 1/2 Revenue (1998): $4.4 Bil. Return On Equity (98): 15.4 % Proj. 5yr EPS Grth: 25.0 % Shares Outstanding: 379.2 Mil. Dividend Yield: Nil Mkt Capitalization: 11.49 Bil. P/E 1998; 1999 : 22.7 X; 13.1 X Current Book Value: $8.41 /sh Convertible: None Debt-to-Capital: 16.2 % Disclosure(s): C, A ------------------------------------------------------------------------------ We are adding Applied Materials to the Lehman Brothers 1998-1999 Ten Uncommon Values List.
The company is positioned for strong growth in 1999, as chip manufacturers worldwide seek to lower their manufacturing costs and increase chip performance by moving to 0.25-0.18 micron processing technology.
A revolution in new materials for 0.18 micron processing should benefit Applied Materials, which is hard at work on systems for exciting new films (copper and low-k dielectrics will not be the only new materials!).
With its rising market share in several products and its in-depth process knowledge, Applied can play an increasing role in next generation chip plants, especially if there is consolidation in semiconductor capacity.
Valuation measures may look high compared to 1996 levels, but Applied Materials' price/sales multiple is among the lowest in the company's recent history, and may reflect an overreaction to the downturn.
Highlights: 1. A bold "uncommon value". The semiconductor production equipment industry's fundamentals are weak, and there are no definitive signs of a turnaround yet. Still, we think this represents one of the best times to purchase Applied Materials' shares in recent years. Why? First, the best values among the premier semiconductor production equipment companies occur before there is evidence of a fundamental upturn. Second, the upside operating leverage, both within the industry and at Applied, is substantial.
2. Opportunities in access to bandwidth. Traditionally, demand for personal computers drove demand for semiconductors, and this in turn governed the opportunities for semiconductor production equipment companies. A new driver is emerging -- hardware to access low-cost bandwidth. As bandwidth (broadly defined as wireline, local area network, cable, wireless and satellite data communications capacity) increases in availability and decreases in cost, there is an incentive for electronics manufacturers to provide low-cost hardware to gain access to it. Traditionally, this function would have been
performed by a computer. Increasingly, it is being performed by Internet appliances (Internet-enabled hand-held PDA's, Internet telephones, and Internet televisions), wireless data modems, and other equipment. These products all share the following three characteristics: (1) they will be sold in high volume (one source estimates that the number of people using Internet appliances will grow by more than a factor of 10X over the next four years); (2) they will be low in cost; and (3) they must use high performance semiconductor technology. All this points to a need for advanced semiconductor production equipment. Applied Materials strength is the high percentage (50%) of its incoming orders that come from advanced equipment.
3. Chip capacity may not be short today, but it could be next year. Although there may seem to be excess chip production capacity today, the forces that would bring things back into balance have been at work for some time. Investment in semiconductor equipment has been weak since 1996, and spending in South Korea and Japan this year will be down by more than half from prior peak levels. The incentive to implement die shrinks on older technology (particularly on 16-megabit DRAMs) is gone. A number of companies are openly discussing chip production cuts. Meanwhile, as chip technology moves ahead at a faster than normal pace, close to 75% of all installed equipment cannot operate at or below 0.25 microns, and the aging capacity that is installed is less and less able to meet next generation requirements. This may not lead to a wave of new chip plant construction, but we think there will have to be an acceleration in advanced fab upgrade/expansion activity, compared to 1998 levels.
4. A note on valuation. Applied Materials' shares are currently trading at approximately 2.5 times trailing revenues. This is above the recent trough valuations of 1.0 in 1996, and modestly below 1.00 in 1990-1991. We do not think this suggests that Applied Materials' valuation is too high. During these two timeframes Applied's shares received no premium to the semiconductor equipment group, even though its fundamentals have consistently been better than those of the industry. In 1990-1991, the company's ability to outperform probably was not fully appreciated. In 1996, the shares may have been penalized by the company's tardiness in seeing the signs of an industry recession. In more typical climates, the company's shares have tended to trade at a relative P/E premium to the group. The current environment is one in which the premium probably can be maintained.
5. Our 1999 estimate is aggressive. Some analysts expect Applied Materials to post a flat to down year in fiscal 1999, and the consensus calls for a moderate increase. Why, then, do we project strong growth? We think it is all too easy to underestimate the upside leverage that this company has during a recovery. On the revenue line, Applied stands to benefit from product strengthening done during the recession, and it should increase its overall market share. On the cost line, current efforts to move the company toward lean manufacturing should help provide leverage in 1999 and beyond. ----------------------------------------------------------------------------- BUSINESS DESCRIPTION: The world leader in semiconductor production equipment, with product offerings in CVD, etch, PVD, CMP, thermal, ion implant and wafer inspection/metrology systems, and related support. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.] |
