# Applied Materials, Inc.

In today’s world, with the growing technological advances, research and development is essential to finding innovative solutions to the cost of technology. The semiconductor equipment industry does just that. This industry manufactures innovative equipment, services, and software which are all used by semiconductor, flat panel display, solar photovoltaic and other related industries worldwide. Their products and services increase productivity and improve performance. The innovations they create help keep the cost low for the new and improved smart phones and the liquid crystal display televisions we see every few months. Applied Materials, Inc was founded in 1967 and is currently headquartered in Santa Clara, California. Let us use the tools learned this semester to analyze the financial statements filed by AMAT for the past five years and consider whether or not I would invest in this company. As of December 6, 2011, the market price for AMAT is \$11.01. Is AMAT overpriced, underpriced, or just right? Let’s use the financial data gathered on Value Line and perform some preliminary tests. Based on the percent change in dividends, there is growth.
Dividend 0.30 0.26 0.24 0.24 0.23 0.16 0.24 Growth Per Year 15.38% 8.33% 0.00% 4.35% 43.75% 14.36%

As shown in the table to the left, the growth per year in dividend varies and therefore this company does not fit a zero growth model. Similarly, using the capital asset pricing model, we calculate the required return on AMAT using . Since the

2011 2010 2009 2008 2007 2006 Average

its beta of 1.05.

average growth for AMAT is larger than the required return based on CAPM, constant growth model cannot be used to calculate its intrinsic value either.

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Our next model test to calculate the intrinsic value is the price to earnings multiplier. Based on the earnings per share for 2011 and the average price to earnings ratio for the past five years, we can calculate the intrinsic value of AMAT. Based on the price to earnings method, the intrinsic value of AMAT is as follows: In contrast, the market value of AMAT as of December 6, 2011 is 11.01. This shows that AMAT is currently undervalued. Let us compare AMAT with its competitors using the price to earnings competitor method. The three suitable competitors for AMAT are Novellus (NVLS), KLA-Tencor (KLAC), and Lam Research (LRCX). Their prices to earnings for 2011 are 9.4, 8.9, and 7.9, respectively. Using an equation similar to that above, we calculate the intrinsic value for AMAT. While

this also shows that AMAT is undervalued, the intrinsic value is much closer to its actual market price today compared to the intrinsic value based on AMAT’s past price to earnings ratios. Since it has been proven that AMAT is presently undervalued in the market, let us continue to analyze its financial
NVLS KLAC LRCS Average 2011 EPS Intrinsc Val EPS Comp 9.4 8.9 7.90 8.73 1.30 11.35

statements to see whether there are any trends we may find of concern and which may influence our decision to invest in AMAT, or vice versa. First, using AMAT’s Balance Sheets and Statements of Operations, we will calculate the days inventories held. The trends here will allow us to see whether they are facing issues with excess inventories. In the table below, we see that while there was a decrease in DIH from 2006 to 2007, there was a significant increase from 2007 to 2009, from 91.43 to 165.80. This trend is of concern because it shows that it was taking longer to move inventories showing signs of possible excess inventories.
Inventory CGS Page | 2 DCGS DIH

2006 1,406,777 4,875,212 13,356.75 105.32 2007 1,313,237 5,242,413 14,362.78 91.43 2008 1,987,017 4,686,412 12,839.48 154.76 2009 1,627,457 3,582,802 9,815.90 165.80 2010 1,547,378 5,833,665 15,982.64 96.82 *Values shown for Inventory and CGS are in thousands. CGS = Cost of Goods Sold, DCGS = Daily Cost of Goods Sold DIH = Days Inventories Held

Moving past the inventories, we will now consider the days sales remained outstanding, which show how quickly they were able to gather payments on sales, which would directly affect their cash flows. Based on the table below, the days sales outstanding has been decreasing from 2006 to 2010. This shows that there is a positive trend present here and it is taking them less time to acquire the cash from their sales.
Receivabl es Net Sales DCS DSO 2006 2,026,199 9,167,014 25,115.11 80.68 2007 2,049,427 9,734,856 26,670.84 76.84 2008 1,691,027 8,129,240 22,271.89 75.93 2009 1,041,495 5,013,607 13,735.91 75.82 2010 1,831,006 9,548,667 26,160.73 69.99 *Values shown for Receivables and Net Sales are in thousands. DCS = Daily Credit Sales, DSO = Days Sales Outstanding

Another analysis related to AMAT’s sales is their total asset turnover, showing how much they generate in sales per unit of asset. In the table below, we see two trends, one of which is of concern. While the total asset turnover increased from 2009 to 2010 showing more sales per unit of asset, from 2006 to 2009, there was a significant decrease, from 96.69 to 52.37 percent.
Net Sales 9,167,014 9,734,856 8,129,240 5,013,607 9,548,667 Total Assets 9,480,837 10,662,278 11,006,318 9,574,243 10,943,345 TATO 96.69% 91.30% 73.86% 52.37% 87.26%

2006 2007 2008 2009 2010

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*Values shown for Net Sales and Total Assets are in thousands.

Let us now consider to debt ratio of the company to see how much of AMAT’s financing is from debt, which directly relates to the flexibility it has in terms of its cash. From 2006 to 2007 and 2008 to 2009, there was a decrease in debt ratio. The trend of concern is the increase in debt ratio from 2007 to 2008 and 2009 to 2010. The increase in debt shows they may possibly be using more debt to finance their assets and therefore may have less flexibility.
Total Total Assets Liabilities Debt Ratio 9,480,837 2,829,437 29.84% 10,662,278 2,840,869 26.64% 11,006,318 3,457,360 31.41% 9,574,243 2,479,635 25.90% 10,943,345 3,407,232 31.14% shown for Total Assets and Liabilities are in thousands.

2006 2007 2008 2009 2010 *Values

The last sets of calculations from the statement of operations we will conduct are the operating and net profit margins. As we see below, there are two trends of concerns. The operating profit margin dropped into the negative from 2007 to 2009 as did the net profit margin during the same time frame. It shows that the operations of the business generated lesser revenue in the three years to an extent that there was a loss from operations in 2009.
Net Operating Operating Net Profit Sales Profit Profit Margin Net Profit Margin 2006 9,167,014 2,020,621 22.04% 1,516,663 16.54% 2007 9,734,856 2,371,506 24.36% 1,710,196 17.57% 2008 8,129,240 1,355,431 16.67% 960,746 11.82% 2009 5,013,607 (393,616) -7.85% (305,327) -6.09% 2010 9,548,667 1,383,708 14.49% 937,866 9.82% *Values shown for Net Sales, Operating and Net Profits (Losses) are in thousands.

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Finally, the last step of analysis of AMAT will be its statements of cash flows. Looking at the table below, we see several trends. Let us consider the positive trends. Operating cash flows from each year were positive, showing that the business was generating positive cash flows from operations. OCF + ICF were positive each year showing that cash inflows exceeded cash outflows. FCF is continuously negative, which shows that AMAT is not continuously using debt or equity to finance operations. While all three trends mentioned above show no concern, let us analyze trends per year.
2006 2007 2008 2009 2010 OCF 1,935,727 2,209,296 1,710,468 332,665 1,722,853 ICF 1,948,986 (976,613) (75,986) 112,689 (861,612) OCF + ICF 3,884,713 1,232,683 1,634,482 445,354 861,241 (4,055,447 (1,426,037 FCF ) (891,989) ) (281,339) (576,131) *All values shown are in thousands. OCF = Operating Cash Flows ICF = Investing Cash Flows, FCF = Financing Cash Flows

Looking at the changes in cash flows each year, we see that the cash flows from operations reduced drastically from 2007 to 2009, consistent with the profit margins mentioned earlier. The sum of operating and investing cash flows while showing a decrease from 2006 to 2007 and 2008 to 2009, it is positive. It shows that cash inflows exceed cash outflows, even in the year they experienced operating and net losses. Based on the numbers we see here, Applied Materials is a company that has shown improvements in the amount of time it takes to move inventory, acquire cash from sales and total asset turnover, especially since its losses in 2009. While the debt ratio has increased from 2009 to 2010, so has their cash outflow from financing activities in the same time period showing possible loan repayments. Using the intrinsic values from AMAT’s own price to earnings as well as that of its competitors, it is an undervalued company. It is therefore my decision to invest in Applied

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Materials, especially because it shows significant improvements in cash flows since its losses in 2009.

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