Jerome, The final article was on the WSJ Electronic Edition. It has a point but from my past experiences, which I am sure Lester E, Tito and others on this thread will express, AMAT has always has had excessive PE during its up cycle. This article sounds just like the 1997 up cycle when AMAT topped out at $108. Lester E and Tito did the same thing occur during the previous upcycles in 1995 and previous years when AMAT topped out.
Perhaps, some of the analyst and firms got out to early and are now trying to drive AMAT down to get again on the upward cycle.
Just my opinions.
Paul
Applied Materials Inc.
Dow Jones Newswires -- May 20, 1999
SMARTMONEY.COM: You Call This A Value Stock?
By Tiernan Ray
Smartmoney.com
NEW YORK (Dow Jones)--The notion of a hi-tech value stock sounds a bit ridiculous these days - what with Cisco Systems (CSCO) trading at 78 times forward earnings, and the excessive premiums on even Dell Computer (DELL) and Intel (INTC), depressed as those stocks are relative to their highs of January. It would be nice to think that there are some value stocks in the tech crowd like Sun Microsystems (SUNW) was last summer. Midway through 1998, Sun was the perfect example of the underappreciated value stock, trading in the mid-40s at a multiple of 20 times 1998 earnings. When investors realized the company stood to expand its margins through high-priced server computers for the Internet, Sun was reborn. At a post-split 63, its stock trades at 45 times projected 1999 earnings.
Is Applied Materials (AMAT), another bellwether tech stock, a value play? There is no easy answer. On the one hand, Applied has vast potential far into the future; I see this company virtually owning the entire equipment business some day. Applied basically holds the chemicals of the chip-making business under lock and key, like guarding the warheads (we hope more successfully than the U.S. has). So the company has a sort of organic law of growth: Given its central position in the industry, its value to customers increases as Applied acquires more and more pieces of the puzzle of chip making. Even at a market cap of $23 billion, that could add to Applied's long-term value.
But much of that value lies many, many years out. It's been said of chip-equipment stocks that the market has never figured out quite how to trade them given the arcane nature of the field. In the past eight months or so, Applied and its competitors have been trading like cyclicals; we're coming off three down years in the chip business. Investors know we're heading into a steady upturn in the chip market, and they've responded by bidding up shares of the companies that make the equipment that's used to make those chips.
At 55 times 1999 expected earnings of $1.18 per share based on Wednesday's closing price of 65 5/16, the stock is actually trading at 463 times trailing 12-month earnings per share of 14 cents. Trailing and forward, those kinds of rich multiples are unprecedented for Applied or any other equipment stock, making it way overvalued. We wrote in December about how chip-equipment companies' valuations had startlingly taken leave of reality. The market said, basically: We don't care what you think, fella s, and AMAT has since appreciated better than 50%. Applied's price today is not simply a phenomenon of an overheated market, but it's one of the main reasons why there simply are no bargains to be found in tech.
Sure, the long-term potential is entrancing, but it's many years out. I sat down with Applied's CEO, James Morgan, and it was interesting what he wouldn't commit to. Three hundred millimeter wafers? Well, they
might be a year 2000 or 2001 or maybe 2002 thing, according to Morgan. More fanciful the idea of Applied taking on some manufacturing on behalf of customers as a service business or entering the so-called back end of the business, where testing of chips takes place, is a "science project" right now, according to Morgan. Morgan is a steady-as-he-goes CEO, and his top priority is keeping his 25-best customers happy as he manages the move to copper and tries to steal some share in existing markets, such as chemical vapor deposition.
All that we have in the meantime are tantalizing unc ertainties. We've seen two interesting reports from brokerages this week: one from Salomon Smith Barney's Miland Bedekar warning of a slowdown in demand
for DRAM later this year and some stumbles, perhaps as the industry tries out copper chips, and another report from Morgan Stanley's Jay Deahna, upping his earnings estimate for this year to $1.60 per share and saying that there'll be a new round of capacity buying in 2000 as the industry burns off existing chip-making capacity and starts to find itsel f short. It's an interesting debate and there's probably something to both sides.
But it may not matter much for Applied. This may be a great stock for the next seven years, and perhaps in that sense it is worth any price today. Applied stock has increased over 2,750% since SmartMoney magazine picked it way back in 1992. But near term, just about anything you could throw at this company on the upside has been fully priced in. At Deahna's price target of $86, by the end of this calendar year we'll sti ll be looking back on a trailing multiple of 54 assuming the company makes in the neighborhood of $1.63 a share. In contrast, back in 1992, just as the chip industry was coming out of the last downturn and bracing for a big jump in sales, Applied traded at 23 times trailing earnings. Deahna's target is, of course, a forward multiple of
29 against earnings of $3 per share in 2000, but even at the beginning of 1994 Applied traded at only 8.5 times what it would make two years out. That forward multiple started to expand back at the end of 1997,
even as investors braced for the worst in the semiconductor market's downturn in 1998, so I suppose you'dhave to say exuberance has been with this stock for some time now, though it's getting more irrational every day.
We said all this six months ago, and no one cared to listen. So I'll say it again now: great company, ridiculous valuation. Could it go higher? Probably. But that doesn't mean it should.
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