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Applied Materials Leads by Example

by: Ockham Research October 09, 2008 | about stocks: AMAT    

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Applied Materials (AMAT) is not only an industry leader in the production of technologies related to capturing solar energy, AMAT is also leading by example in recently converting its corporate headquarters to run on solar power. On September 19th, Applied Materials in conjunction with SunPower Corp. (SPWR) completed two solar power systems at AMAT’s corporate headquarters in Santa Clara, California. While the project is clearly self-serving to AMAT, the nation’s largest solar powered corporate office could serve as a model for others to follow. Clearly, Applied Materials has become far more than a semiconductor company since entering solar in 2006.AMAT

The costs of such a system were not made available, but clearly AMAT took advantage of the federal investment-tax credit aimed at spurring investment in alternative and renewable energies. This tax credit (as political observers know) is set to expire at year’s end, but no matter who gets elected in November, energy will be a major issue. There is a strong possibility that the next administration will enact some form of program to deploy more energy alternatives, in hopes of achieving the oft-mentioned “energy independence”.  Applied Materials would undoubtedly benefit from the extension of such a policy.

It is not just America that is clamoring for alternative sources of energy. The developing world is hungry for energy as well and large solar projects are already underway in India and China. A report by GreenTech Media and the Prometheus Institute predicts that the thin-film solar industry is expected to double each of the next 3 years!

We are not saying that solar energy will either make us “energy independent” or in fact become the most cost effective source of alternative energy, but to us it seems to be an industry that has great potential for growth. We touted AMAT as Undervalued back in March (Applied Materials: Going Green) at a price just below $19 because we saw increasing revenues and growth looked positive. We believe that now, at near a ten year low price of below $13, this stock is Greatly Undervalued. This stock is a prime example of one that is being dragged down unfairly in a difficult market because the company continues to report sales growth and positive earnings. As of the last quarterly report, management expects fourth quarter revenues to be up 2%-10% and orders are expected to increase 5%-10%.

At Ockham Research, we understand that it can be difficult to invest in any company right now, but as the saying goes, “be greedy when others are fearful.” It is impossible to deny AMAT is cheap right now when compared to what the market has historically been willing to pay for the shares. For example, over the last ten years, AMAT has traded between 2.6 and 5.0 times sales, but the stock is currently well below this range at a price-to-sales of 2.0. Furthermore, AMAT’s price-to-cash flow is currently 10.4, while this stock has historically ranged between 17.2x and 31.3x. So, for Applied Materials to trade within these historically normal bounds, the stock would need to appreciate to at least $22. That being said, these are not normal times and it may take some time before the market again recognizes the underlying value of such a company.

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This article has 2 comments:

  •  
    Oct 10 08:59 AM
    The semiconductor industry, AMAT's flagship line, is in the toilet, that's issue number 1. In the solar industry, AMAT is selling a "me-too" product line -- high cost vacuum deposited low efficiency (8%) amorphous silicon. That was a good idea AMAT had when it had a lot of its equipment sitting around waiting for the LCD industry to wake up (the original design of its solar machines) and decided to call them a Solar Machine. At the time, no one could get polysilicon to make the really good stuff and there were only a few companies offering a turnkey approach to making the bad stuff, such as Oerlikon. AMAT was in the right place at the right time. Now, there is no shortage of polysilicon, CdTe sales are going through the roof because of high efficiencies, CIGS is starting to see some revenue stream, also with a high efficiency. The amount of capacity in hand to make solar cells is 2X the actual sales this year and in the forseeable future. Oil prices are plummeting, which when at $145 a barrel was a driving voice for renewable, and European countries are eliminating subsidies. Finally Pickens was instrumental in making the country see the value of wind. So where does that leave AMAT?
    Reply
  •  
    Oct 14 04:52 AM
    Best Solar (China) is working with AMAT to build a 2GW production line.
    Want to visit best Solar? Join the International Trade Mission to China (24 - 28 November 2008) pvtourchina.com / solarplaza.com.
    Reply
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