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| With the slumping economy hitting the high-tech sector so hard, you might think Applied Materials would be the 98-pound weakling of the semiconductor-equipment industry. But don't go kicking sand in AMAT
's face. Though its short-term outlook is uncertain, the company should emerge from the industrywide slump in far better shape than its competitors.
As a result of the sales slump, chipmakers are coping with bloated inventories. And when inventories are high, production decreases, thereby reducing the need for chipmaking gear. That's the bad news for Applied Materials, which develops, makes, sells, and services semiconductor wafer-fabrication equipment and related spare parts for chipmakers. The result: AMAT saw its stock drop about 58% last December from its 52-week high of $115 last April. The stock now has settled at about $50.
When Applied Materials reported earnings for its first fiscal quarter on Feb. 13, its $0.66 per share missed Wall Street's consensus estimates by $0.04, as orders dropped a surprising 33% from its fiscal fourth quarter. The company offered a gloomy outlook, forecasting a 20% drop in industrywide 2001 wafer-fabrication equipment sales.
ASK A ROBOT. But truth is, there's nothing unusual or alarming in all this. The semiconductor industry is cyclical, with booms and busts occurring every few years. Downward revisions of estimates, additional layoffs, and write-offs of assets are the norm when orders dry up.
"If you go to just about anybody, whether it's General Motors or Applied Materials, and take their bookings down [significantly] over the course of 12 months, a robot could figure out what's going to happen," says Theodore O'Neill, principal and senior analyst at Needham & Co. "Inventories are going to mushroom, you can't cut expenses fast enough, so you get a major erosion of your operating margins." Since AMAT's products have a built-in obsolescence, he adds, an inventory write-off is expected.
But O'Neill, who's moving to C.E. Unterberg Towbin as managing director/senior analyst, predicts that the current industry down cycle will end in November. And the silver lining for Applied Materials is that, even though sales have slumped overall in this downturn, it has gained substantial market share from rivals: Its share is 20% higher than it has ever been at this point in a cycle, according to O'Neill.
BOTTOMS UP. It works like this: Usually at the peak of a cycle, during an industry boom, the company's market share will decline a bit as customers spread orders among other companies in the field. But at the bottom of a cycle, questions tend to rise about the stability of the smaller companies. As the industry leader, Applied Materials should reap the rewards of that mind-set. It has plenty of cash, and no one thinks it would fold if the slump lasts longer than anticipated.
Sales of chip-related products are certain to pick up again as demand for smart devices increases. More and more people getting connected to the Internet will be a big factor. "The inherent underlying demand for chips is very strong," notes James Morgan, chairman and chief executive officer of Applied Materials (for an audio interview with James Morgan, click here). "And our equipment makes virtually every chip, every day, everywhere in the world. So there's a great opportunity ahead for us."
Morgan remains optimistic despite the slowdown. "We've had a compounded growth rate through these ups and downs of around 30% for the past 25 years, so we've had a pretty good experience." Management's confidence is reflected in a Mar. 23 announcement that it renewed its existing stock-repurchase program to allow for the buyback of up to $2 billion of its own shares over a three-year time frame.
PAY TO GO. When the economy is threatening to downshift, Applied Materials focuses on containing costs and improving efficiencies, Morgan says. "And consistently over the years, we've come out of these [downturns] gaining market share and strengthening our global position." Some of those cost-cutting moves were detailed on Mar. 15, when the company announced a "voluntary separation plan" to some 1,000 employees that would provide a pay and benefits package to those who choose to depart under the program.
But the consensus among analysts is that Applied Materials is a well-managed company that's solidly positioned. "Because it's the biggest company in its group, AMAT is considered a core holding by many investors, both private and institutional," says Thomas Smith, an analyst at Standard & Poor's. When the chip industry turns around, AMAT could well lead the comeback. Then the beaten-down shares should bounce back from their current levels. A 98-pound weakling? No, more like an 800-pound gorilla. |
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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