Applied Materials: Chipper Future
Better products and expansion into new markets are helping this manufacturer of chip-making gear succeed just as demand for chips swells.
Chipmakers shop at Applied Materials. The Santa Clara, Cal., company makes tools that produce, etch, measure and inspect circuit patterns on computer chips. Its business succeeds or fails based on the demand for chips. Ben Pang, an analyst with Prudential Equity Group, expects rapid earnings growth at the company into 2007 as the worldwide appetite for cell phones, flat-panel TVs and personal computers swells. Pang on Tuesday upgraded the stock (symbol AMAT) from neutral to "overweight."
Applied Materials is a jack of all trades when it comes to chip-making gear. It is the largest equipment maker and has the broadest line of products. But last year, the company lost market share to competitors. Only recently has Applied Materials been able to stop the bleeding with better products and an expansion into new markets, Pang says. Orders in the quarter ended April 30 were $2.5 billion, up 60% from a year earlier. Net income rose to $413 million, or 26 cents per share, from $305 million, or 18 cents per share, in the year-earlier quarter. That beat the 23 cents per share analysts expected the company to earn in that period, according to Thomson First Call. Chief Executive Michael Splinter forecasts that total sales will grow 20% to 25% this year.
Side businesses should help Applied Materials generate more earnings growth, Pang says. In May, the company said it would buy Applied Films Corp., a solar-panel equipment maker, for $464 million. It also launched a joint venture with Dainippon Screen Manufacturing to make tools -- called "track" -- used in advanced chip manufacturing. Market researcher Gartner Dataquest estimates that the market for track systems will grow to $2 billion by 2008, from $1.4 billion last year.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Last month's shopping spree has not tapped out Applied Materials. In fact, the company is flush with cash. It had $3.3 billion as of April 30, which gives the company the flexibility to pay dividends, repurchase shares or invest more in new businesses. The cash stash, says Pang, also means that when chip orders sag, as they inevitably will at some point, Applied Materials will weather the downturn better than its smaller rivals.
Pang says the stock, recently $16, looks attractively priced at 12 times his profit estimate of $1.29 per share for the 2007 calendar year. He set a 12-month target price of $21. The stock is down 71% from its 2000 high of $57.50.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Nasdaq Ends the Week at a New High: Stock Market Today
The S&P 500 came within a hair of a new high, while the Dow Jones Industrial Average still has yet to hit a fresh peak in 2025.
-
Google's AI Overview Is Wrong About Life Insurance 57% of the Time, Says Study
You need more than a grain of salt when getting life insurance tips from Google's AI overview.
-
What Tariffs Mean for Your Sector Exposure
New, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the Fed
A lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?
Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second Term
Six months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have Today
Berkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have Today
Procter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
My Three-Day Rule for Investing: And If it Applies Now
Stock Market I've seen a lot in my career. Here's what I see now in the stock market.
-
Is It Time to Invest in Europe?
Stock Market Europe is being shaken out of its lethargy, militarily and otherwise, by Donald Trump's changes in U.S. policy. Should investors start buying?