Clean-room equipment maker Applied Materials (NASDAQ:AMAT) is coming off a whiz-bang fiscal 2006 with an additional boost in Q4. Management chalked up the excellent performance to meeting its three core goals of introducing meaningful new products in its core markets, expanding into new markets, and running a tight ship financially.
Support and maintenance services for manufacturing equipment already sold and deployed by customers is a growing contributor to the top and bottom lines, with sales in that sector growing from 12% of revenues in 2000 to twice that in the just-finished year. It's also a high-margin business with little or no R&D budget or manufacturing costs attached, so that growth vector is a welcome one, and an important factor in the company's overall profit growth.
That service revenue stream is akin to the strategy made famous by Procter & Gamble's (NYSE:PG) Gillette brand of giving away the handles but making a killing on razor blades. It's even closer to Intuitive Surgical's (NASDAQ:ISRG) way of selling a hugely expensive surgery robot and then cashing in on a steady stream of single-use supplies for it. Applied Materials serves customers like Texas Instruments (NYSE:TXN), Intel (NASDAQ:INTC), Toshiba, and Taiwan Semiconductor Manufacturing (NYSE:TSM), which all are stacked to the gills with brilliant engineers, but sometimes you just need the equipment manufacturer to come out and service your machinery.
The company's closest North American competitor, KLA-Tencor (NASDAQ:KLAC) sports about one-fifth of Applied Materials' $9.2 billion in annual sales, and even Tokyo Electron, the largest global rival, can only muster about 60% of that haul. And as Applied Materials moves into fields like solar panel manufacturing and flat-panel color filters, it stands to reason that revenues should continue to grow faster than the semiconductor manufacturing machinery sector in general.
As always, you should do your own due diligence, but this company looks mighty tasty right about now -- especially since the stock looks downright cheap next to the competition. Oh, that inscrutable Mr. Market...
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Fool contributor Anders Bylund is a shareholder in Intuitive Surgical and Taiwan Semiconductor, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always in the money.
