Analyst: For Applied Materials, 'Every Year Is A Peak Year'

Applied Materials, Inc. AMAT reported Thursday its fiscal fourth quarter results, which included a top and bottom-line beat and encouraging guidance for the upcoming fiscal year.

The Analyst

Credit Suisse's Farhan Ahmad maintains an Outperform rating on Applied Materials' stock with a price target boosted from $62 to $72.

The Thesis

Applied Materials reported a "solid" beat in the quarter and management's guidance implies calendar year 2018 will mark the sixth consecutive year of growth, Ahmad said in a note. This marks a "sharp contrast" from 1997 through 2012 when the company was unable to show more than two years of consecutive growth. In retrospect, the stock's multiple over the past few years now appear to be too low and doesn't factor in the company's growth from rising capital intensity, margin improvement and a best in class management team.

With that said, investors are wrong in assuming that Applied Materials is a "pure cyclical company," the analyst said. Rather, Applied Materials is very much a "growth company" with a "solid" history of buybacks as it has reduced the share count by 35 percent over the past 12 years and is on track to lower the share count by another 6 percent over the next three years coupled with cash returns to shareholders.

Price Action

The stock is trading at 14 times the analyst's CY18 EPS, which implies a 22 percent discount to the S&P 500 index and a more appropriate valuation would be 16 times plus net cash.

"Every Year is a Peak Year for Gary’s [CEO Gary Dickerson] AMAT," the analyst said.

Shares of Applied Materials hit a new 52-week high of $60.89 Friday morning, but gave back all of the gains and was trading lower by more than 1 percent heading into the afternoon.

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