Applied Materials Inc (AMAT, Financial) is currently trading at $140.55 per share, marking a daily gain of 2.15%. Over the last three months, it has seen a gain of 8.56%, with an Earnings Per Share (EPS) (EPS) of 7.58. But the question remains: is the stock fairly valued?
In this article, we'll conduct a thorough valuation analysis of Applied Materials. We encourage you to read on for an in-depth exploration of the company's financial performance and intrinsic value.
A Snapshot of Applied Materials Inc
As the world's largest supplier of semiconductor manufacturing equipment, Applied Materials provides materials engineering solutions that help create nearly every chip in the world. Their systems are used in almost every major process step, except for 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.
With a market cap of $118 billion, the company's stock price appears to be fairly valued at $140.55 per share, compared to its GF Value of $131.12. This GF Value is an estimation of the fair value of the stock, providing a basis for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Applied Materials (AMAT, Financial) appears to be fairly valued according to the GF Value. If a stock's price is significantly above the GF Value Line, it is considered overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. With a market cap of $118 billion, Applied Materials seems to be fairly valued at its current price of $140.55 per share.
Because 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 deliver higher future returns at reduced risk.
Financial Strength of Applied Materials
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it's crucial to review a company's financial strength before deciding to buy its stock. A good starting point is looking at the cash-to-debt ratio and interest coverage. Applied Materials has a cash-to-debt ratio of 0.83, which is worse than 67.51% of companies in the Semiconductors industry. However, GuruFocus ranks the overall financial strength of Applied Materials at 8 out of 10, indicating that the company's financial strength is robust.
Profitability and Growth of Applied Materials
Investing in profitable companies carries less risk, especially if they have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Applied Materials has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $26.60 billion and Earnings Per Share (EPS) of $7.58. Its operating margin of 29.28% is better than 92.84% of companies in the Semiconductors industry. GuruFocus ranks Applied Materials' profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Applied Materials is 23.9%, which ranks better than 75.17% of companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 32.1%, which ranks better than 61.82% of companies in the Semiconductors industry.
ROIC vs WACC
Another method of determining a company's profitability is to compare its Return on Invested Capital (ROIC) with the Weighted Average Cost of Capital (WACC). The 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Applied Materials's return on invested capital is 33.65, and its cost of capital is 13.97.
Conclusion
In conclusion, the stock of Applied Materials (AMAT, Financial) appears to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 61.82% of 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, check out the GuruFocus High Quality Low Capex Screener.
