AMAT Stock Forecast For 2019

 

 

This article was written by Vladimir Mazepa, a Financial Analyst at I Know First.

[Source: Wikimedia]

Summary:

  • From technical perspective AMAT shows an opportunity to buy stock with a reasonable discount, where it is traded with a 38% discount from the last peak in March 2018.
  • Financially AMAT is undervalued among its peers and trading at 11.82 Price to Earnings ratio, compared to 17.61 in the industry. Price/Book is a bit higher than average in the industry (4.81) and Price to Sales 2.27 and are lower than the average industry 3.42.
  • AMAT generates stable positive Free Cash Flow
  • Operating Margin is quite good for semiconductor industry with almost about 30%, which helps the company manage the possible problems in the future.
  • Applied Materials invests in good projects by showing excellent Return on Equity – 40.93%, Assets – 17.82%, Capital – 25.26%.
  • AMAT boosts its dividend to $0.20 from $0.10 per share with a yield at 2.1%

AMAT SWOT

Strengths

Weaknesses

Opportunuties

Threats

Applied Materials Technical Signal To BuyArguable Debt To Equity RatioManagement Expects RecoveryNo Recovery – No Gains
Decent R&D InvestmentsDecline In EarningsApplied Materials Potential Ways Of Development
Operating Margin Is Great
Stable Free Cash Flow
Excellent Return On Equity, Assets, Capital
Financially Undervalued AMAT

Strengths

Applied Materials Technical Signal To Buy

From technical perspective AMAT is a perfect buy. RSI is above 50 and not higher than 70, which shows the possible continuation of the uptrend. It has just recently crossed a one-year trendline, which creates a bullish signal for buy alongside with a good price at 38.20.

[Source: Ycharts]

[Source: Ycharts]

Decent R&D Investments

When it comes to semiconductors, it is highly important to invest in R&D if you want to be competitive on the market. It can be clearly seen that Applied Materials invest decent portions of cash on its R&D, with 8 years range from about 10 to 18%, which is quite good.

[Source: YCharts]

Operating Margin Is Great

A company such as Applied Material should have high operating margin, since semiconductors industry is very unstable and demand can vary and change rapidly. Thus, high operating margin gives a company a soft pillow whilst hard times. It can be seen that the company extracts very high portions of margin, almost 30%, and that is very good.

[Source: Macrotrends]

Stable Free Cash Flow

It can be seen that AMAT generates positive Operating and Free Cash Flow. It should also be noticed that semiconductors industry is very fluctuated and cyclical and that is why in one year you can see a decline in Cash Flow Growth and next year huge boost, this is how semiconductors work.

[Source: Marketwatch]

Excellent Return On Equity, Assets, Capital

Return on Equity is 40.93% (27.5% 5-Year Average), Return on Assets is 17.82% (13.50% 5-Year Average) and Return on Capital is 25.26% (18.90% 5-Year Average), which is excellent. It shows that the management of the company is doing their job great, since they choose great projects to invest in and consequently get good return on those investments.

[Source: MSN]

AMAT – A Leader In Semiconductors Equipment Market Revenue

Market Share is very important to see, how the company is positioned among its competitors at the present moment. As it can be seen, Applied Materials is holding leading position in the global semiconductor equipment revenue with promising 17.7%. According to the data, it has just few competitors: ASML -12.1%, Lam Research – 14% and Tokyo Electron – 15%.

[Source: Statista]

[Source: Statista]

Financially Undervalued AMAT

AMAT is currently undervalued and trading at 11.82 Price to Earnings ratio, compared to 17.61 in the industry. Price/Book is a bit higher than average in the industry (4.81) and Price to Sales 2.27 and are lower than the average industry 3.42.

As the companies have different valuation or tax systems, P/E can often mislead an investor with numbers. That is why it is better to have a look at EV/EBIT and EV/EBITDA, which are hard to manipulate with. And again, AMAT is the second most undervalued company after Micron with EV/EBIT (Enterprise Value to Earnings before Interests and Taxes) – 7.654, with EV/REVENUES (Enterprise Value to Revenues) – 2.186 and third after Micron and NXP Semiconductors with EV/EBITDA (Enterprise Value before Interests, Taxes, Depreciation and Amortization) – 7.004.

[Source: MSN]

[Source: Ycharts]

[Source: Ycharts]

[Source: Ycharts]

Boosted Dividends

Shareholders want to have a stable return on their investments from the companies, which are already established on the market strategy. Applied Materials supports this idea and pays at moment 2.1%.

The company did not have a stable dividend policy, but it boosted its dividend on 5/23/2018 to $0.20 per share from $0.10 per share, so simply doubled it. Moreover, I can assume that this increase in payout ratio is likely to continue going up, because the company has largely increased its Free Cash Flow Per Share, which gives it a possibility to do so (see the graphs below).

[Source: Streetinsider]

[Source: Ycharts]

Bullish Analyst Recommendations

The majority of analysts have a bullish outlook for AMAT. Of the 21 analysts 18 recommend buying, 5 of these 18 rate AMAT as a strong buy. Only 3 analysts give AMAT a neutral rating.

[Source:Yahoo Finance]

Weaknesses

Arguable Debt To Equity Ratio

Debt to Equity ratio is currently 0.77. It is better to see this ratio 0.5, which represents that debt is funded 2x by Shareholders, but 0.77 is not bad itself and does not harm company future growth.

[Source: SimplyWall]

Decline In Earnings

Analysts expect Applied Materials to post sales drop 11.5% to $15.27 billion and EPS drop 23.4% to $3.41.

Applied Materials disappointed investors by forecasting revenue and sales below estimates. We saw a boom in the chip industry and it is likely to show us a slowdown. Management of the company claimed that trade tensions and a pullback in memory chip investments pressured industry wide spending.

“AMAT is likely to see further downside from both memory and display capex spend from its customers,” said Kinngai Chan, an analyst with Summit Insights Group.

He also said that as this industry is cyclical, the company could spend one-two quarters before rebounding.

The very important now is what happening to China.

However, this situation is happening across all the semiconductor sector, so it is not a problem inside the company.

Opportunities

Management Expects Recovery

Having said about drop, on the other hand it is pointed out by the analysts that a revenue and EPS rebound is to be seen in 2020 to $17.05 billion and $4.37. As current P/E is 11.82, stocks is trading now at a very attractive future potential P/E of about 9.

Management also claimed that semiconductor demand is going to improve in the second half of 2019.

Applied Materials Potential Ways Of Development

CEO Gary Dickerson sees following growth opportunities for the company: 3D NAND flash, foundry, lithography patterning, display.

By implementing these technologies, AMAT can open a window for company future growth.

Threats

No Recovery – No Gains

According to recent news, Goldman Sachs analyst Mark Delaney claimed that decline in memory prices and weaker demand for smartphones is decreasing memory fundamentals. He also stated that semiconductors rally is not so promising when fundamentals are weak.

Management of the company expects to see a recovery in the second half of 2019. However, taking into account global economic slowdown and also if there is no recovery in earnings for semiconductors by that moment, this could bring semiconductors to decline and investors may see even much higher decline in share price.

Conclusion

The only problem, which can create obstacles to the company is semiconductor expected EPS drop in 1Q 2019 due to China tensions and consequently falling demand from its customers.

I rate AMAT as buy, because it is traded at a very attractive 38% discount from the last peak in March 2018 alongside with strong fundametals by having positive free cash flow, quite high operating margin (30%) for the industry and excellent returns on equity – 40.93%, assets – 17.82% and capital – 25.25%. Moreover, Applied Material has boosted dividend policy from $0.10 to $0.20 per share with a current yield at 2.1%. In addition, AMAT is undervalued among its competitors and is trading at 11.82 P/E compared to 17.61 in the industry.

Despite the fact that semiconductors expect much lower earnings per share, I rate Applied Materials as a buy on a reasons stated in the previous paragraph and in addition on a positive executive’s comment that semiconductors are likely to improve in the second half of 2019 and that it is currently trading at a future growth potential P/E of 9.

I Know First Long-Term Bullish Forecast For 2019

The I Know First machine learning algorithm currently has a positive and negative outlook for AMAT. The stock is bullish over 1 month and a year horizon. It is negative over 3 months horizon and it is most bullish for the 1-year period with a signal of 17.43 and predictability indicator of 0.73.

How to interpret this diagram

Past I Know First Success With Applied Materials

On October 5th, 2015, I Know First’s algorithm made a bullish forecast on AMAT for a time frame of one year. As shown below, during the time period from October 5th, 2015 to October 5th, 2016, AMAT grew by 104.15%, confirming I Know First’s algorithm’s forecast.

How to interpret this diagram

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Please note – for trading decisions use the most recent forecast.