3 Things to Watch With Applied Materials

Applied Materials (Nasdaq: AMAT  ) is the world's largest semiconductor equipment manufacturer. If the global economy is strong and the demand for high-tech gadgets is robust, Applied Materials' business will likely be booming. If China's slowdown or European worries weigh on growth, then it may not perform as well.

Today, let's look at three things investors should be watching regarding Applied Materials, as they will provide us better insight into the company.

1. Fabless semiconductor demand
Contracted fabless semiconductor makers Taiwan Semiconductor (NYSE: TSM  ) and United Microelectronics (NYSE: UMC  ) rely on strong smartphone and tablet demand to stay profitable. As long as consumers continue to want these gadgets, Applied Materials' equipment business should benefit.

The good news is this trend is in Applied Materials' favor. According to website GigaOM, smartphone prices dipped to an average selling price of only $135 by late 2011 and had dipped in four consecutive quarters. As smartphones become cheaper, it makes them affordable for a wider swath of consumers. More units being sold presumably equates to higher production capacity and more business for Applied Materials.

2. Solar industry pricing
In 2011, Applied Materials purchased Variant Semiconductor and its solar equipment operations for $4.9 billion. Until now, that purchase hasn't exactly panned out as the company had planned. Polysilicon prices and global demand for solar have plummeted as governments have reined in spending and subsidies on the efficient, clean-energy fuel source.

Despite this, Applied Materials still produced a $0.01 non-GAAP profit from its solar equipment segment in the second quarter. Rather than sitting back and allowing itself to be undercut in pricing by Chinese competitors, the company outlined a plan in the first quarter to move its solar equipment operations from Switzerland to China. The move will mean a short-term black-and-blue mark on earnings, but may give the company a competitive labor-margin edge over U.S.-based solar firms like First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWR  ) , who don't have the luxury of relying on cheap labor forces to produce their solar products and continue to be undercut on price in many cases by China-based solar firms.

3. Dividend growth
Applied Materials hasn't exactly lit the world on fire with its dividend growth, but it nonetheless has tripled its quarterly payout to $0.09 from $0.03 in just seven years with five dividend hikes along the way.

Source: Dividata. * Estimated annual payout assuming $0.09/quarter.

The company's current payout ratio of just 31% gives its current yield of 3.3% considerable room to head higher. Its most recent quarter featured one of those aforementioned five dividend boosts, and an increase in operating cash flow to 24% of net sales. With nearly $2.2 billion in cash and $220 million in net cash, Applied Materials' strong cash flow should dictate the likelihood of future dividend hikes.

Dig deeper
Now that you know what to watch for, it should be easier to analyze Applied Materials' successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Applied Materials, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

Applied Materials may be on the front lines of the smartphone revolution -- but that isn't the only game-changing technology emerging in this sector. See what three stocks our analysts at Stock Advisor feel are must-owns for the "New Industrial Revolution" by clicking here to get your free copy of our latest report.

Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2012, at 1:40 AM, digitalroom wrote:

    AMAT is da bomb for me! Great co., great stock!

  • Report this Comment On June 21, 2012, at 12:35 AM, mattceni wrote:

    Thanks for bringing attention to Applied Materials and its leadership position in the technology and energy industries. I did want to clarify, however, point number 2.

    Applied Materials purchased Varian Semiconductor Associates Inc., not Variant Semiconductor. During the acquisition, the company cited the formation of the industry’s leading supplier of equipment and services for transistor technologies and its capability to support customers in delivering faster, higher performance, power-efficient chips. Varian was primarily purchased as a way to significantly enhance the company’s value to customers in helping them with their most complex challenges to extend Moore’s Law far into the future. And to point out, Varian had all-time record revenue just last fiscal quarter and is performing as the company would hope.

    Applied is supporting Varian’s Solion product, but to characterize the acquisition has not being ideal due to the solar product category would be misleading. Applied’s c-Si solar business has experienced difficulty given the overcapacity that exists in the marketplace, but remain end-market demand remains strong and allows for long-term growth of the solar business.

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