This article is second in the series of articles about share buybacks and whether the company doing them is returning value to share holders. The first article can be found here.
Companies With Buybacks: ISRG Edition
Today, I am going to cover one of my holdings, Applied Materials (NASDAQ:AMAT). AMAT announced its fourth-quarter results yesterday (Nov. 17, 2011), so this also gives me an opportunity to look at the results briefly.
AMAT is the world's largest supplier in the semiconductor equipment market. AMAT sells semiconductor fabrication tools to chip makers (offers tools for 11 of the 13 most significant steps of chip manufacturing). AMAT has a larger portfolio of semiconductor fabrication tools than any other company in the same business and it competes mostly against smaller companies that specialize in specific areas of the fabrication process. AMAT's vast resources allow it to remain competitive in nearly all of its production segments. However, AMAT's operations cover many areas of the semiconductor equipment industry, making AMAT vulnerable to industry cycles. The last major downturn of the semiconductor industry was in 2000.
AMAT operates in the following segments.
- Silicon Systems Group (SSG): provides tools and equipments for various steps of semiconductor manufacturing process
- Applied Global Services (AGS): produces spares and provides replacement services for old customers.
- Display Segment: Sells products for manufacturing LCDs for TVs and PCs.
- Energy and Environmental Solutions (EESS): Sells equipment for fabricating solar PV products, coating systems and energy efficient glass manufacturing equipment.
Compensation practice AMAT treats its shares quite well. The burn rate (amount of the number of equity awards granted, reduced by forfeitures and cancellations, as a percentage of our total outstanding shares) was -0.3% in 2010. It aims to keep it low.
- Non-employee directors receive $200,000 worth of stock each year.
- There is no guaranteed bonus for employees or non-employees.
- The directors and executive committee as a group hold 7,623,918 which is less than 1% of the shares outstanding.
AMAT has a very strong balance sheet. Cash and equivalents are $5.9 billion which is enough to pay all liabilities an still have nearly a $1 billion surplus.
| October 31,|
|Cash and cash equivalents||5,960||1,858|
|Total current assets||10,355||6,765|
|Total current liabilities||2,794||2,888|
|Total stockholders' equity||8,800||7,536|
|Total liabilities and stockholders' equity||13,861||10,943|
Also, this is not something new. AMAT never had a debt/equity ratio of greater than 0.07 (except in the current quarter, which is 0.23) in the last decade. The high debt/equity in the current quarter is due to an all-cash purchase of Varian for $4.5 billion.
AMAT has a strong history of buybacks.
|Stock Bought Back||-||-0.41%||2.53%||-3.61%||3.87%||5.91%||9.68%||3.82%||3.11%||-1.16%|
There has been a 20% decline in the shares outstanding since 2001. The company has a running buyback policy until March 2013 of $2 billion. In this fiscal year the company bought back $468 million worth of shares.
The company acquired Varian for the price of $4.5 billion. It expects to make sales of $1.5 billion by this acquisition. Varian has maintained a net margin of around 20% (2010 and second quarter 2011). Using the P/S and P/E or 10, AMAT has overpaid by nearly 50% for this acquisition.
For the first quarter of fiscal 2012, and including the impact of the recent acquisition of Varian Semiconductor Equipment, Applied expects net sales to be down 5% to 15% sequentially. The company expects non-GAAP EPS to be in the range of $0.08 to $0.16. The non-GAAP EPS outlook excludes known charges related to completed acquisitions of approximately $0.10 per share but does not exclude other non-GAAP adjustments that may arise subsequent to this release.
AMAT is tied hand and foot to the vagaries of the semiconductor industry.
In the last decade, the company never had a negative FCF. Following is the table relevant to our valuation quest. The current stock price of $11.41 implies that the market is expecting AMAT to shrink its FCF at the rate of -7%.
Comparing AMAT to its competitors we see that AMAT is the cheapest and the most shareholder friendly across the industry.
Forgetting the fancy calculations, the company sells for $15 billion as of today ($11.34 per share). After paying all its liabilities, the company will have left over current assets of $5 billion. So, in effect AMAT is selling for $10 billion and has $2 billion in FCF and $11 billion in sales (with 20% net margin). Whichever way you cut it, this is pretty cheap,
Conclusion I conclude with the following table.
|Shareholder friendliness||Running buyback and 2.6% yield|
|Balance sheet||Rock solid|
We see that AMAT is doing quite well by buying back shares and I will look towards buying more of the stock if it gets down to $9 or so. With the next quarter outlook of EPS in the range $0.08-$0.16, I would expect the shares to hit the price in the next few months. I would also remind the risk of the cyclicality of the industry, so be aware of it before jumping in.