Applied Materials Inc (AMAT, Financial) experienced a day's loss of -5.01% and a 3-month gain of 8.3%. With an Earnings Per Share (EPS) (EPS) of 7.58, the question arises: is the stock fairly valued? This article provides an in-depth valuation analysis of Applied Materials, exploring its financial strength, profitability, and growth. We invite you to read on for a deeper understanding of the company's value.
Company Overview
Applied Materials is the world's largest supplier of semiconductor manufacturing equipment, offering materials engineering solutions that contribute to nearly every chip in the world. Its systems are utilized in almost every major process step, excluding lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect inspection scanning electron microscopes.
At a stock price of $145.51, Applied Materials (AMAT, Financial) has a market cap of $121.70 billion. Comparing this to the GF Value of $143.04, we find that the stock is fairly valued. This sets the stage for a more detailed exploration of Applied Materials' intrinsic value.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
Applied Materials (AMAT, Financial) is believed to be fairly valued according to GuruFocus' valuation method. If the stock's share price is significantly above the GF Value Line, it may be overvalued and likely to offer poor future returns. Conversely, if it's significantly below the GF Value Line, the stock may be undervalued and could deliver high future returns. As Applied Materials is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Link: These companies may deliever higher future returns at reduced risk.
Assessing Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy its stock. A great starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage. Applied Materials has a cash-to-debt ratio of 1.07, which is worse than 63.69% of 895 companies in the Semiconductors industry. However, GuruFocus ranks the overall financial strength of Applied Materials at 8 out of 10, indicating strong financial health.
Profitability and Growth
Companies that have been consistently profitable over the long term pose less risk for investors. Higher profit margins usually indicate a better investment compared to a company with lower profit margins. Applied Materials has been profitable 10 years over the past decade. With a revenue of $26.50 billion and an EPS of $7.58 in the past twelve months, its operating margin is 28.92%, ranking better than 92.86% of 938 companies in the Semiconductors industry. Overall, the profitability of Applied Materials is ranked 10 out of 10, indicating strong profitability.
Growth is arguably the most crucial factor in a company's valuation. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. Applied Materials' 3-year average annual revenue growth rate is 23.9%, ranking better than 75.09% of 863 companies in the Semiconductors industry. Its 3-year average EBITDA growth rate is 32.1%, ranking better than 61.75% of 766 companies in the Semiconductors industry.
ROIC vs WACC
Another way to evaluate a company's profitability is by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, Applied Materials' ROIC was 32.44 while its WACC was 14.7.
Conclusion
In summary, the stock of Applied Materials (AMAT, Financial) is believed to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 61.75% of 766 companies in the Semiconductors industry. To learn more about Applied Materials stock, you can check out its 30-Year Financials here.
To find high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
