Applied Materials: 2014 Recap & What To Expect In 2015

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Applied Materials

Even though Applied Materials (NASDAQ:AMAT) witnessed a steep decline in its fiscal 2013 (ended with October) revenues, the year was a transformative one for the company as it aligned its business around discreet vectors: 1) developing its precision materials engineering; 2) increasing its focus on areas that have the biggest impact for customers;  3) shifting spending from low-growth businesses and corporate functions to field resources and product development; and, 4) and investing a strong pipeline of new products. In addition to internal factors, the improving industry outlook helped Applied re-accelerate its growth in fiscal 2014 as its revenue and net income for the year grew by 21% and 332%, respectively. Excluding solar, Applied’s fiscal 2014 revenue was the highest in seven years, driven by strong growth momentum in semiconductor, display and Applied’s global services (AGS) segments. Additionally, the company achieved a three year high in both operating margin and net income and boosted its EPS by more than 80%, to $1.07 per share.

Though Applied’s stock price initially declined marginally after the Q4 2014 earnings release on November 13, as its Q1 2015 guidance failed to meet analyst expectations, the stock is up more than 10% since then as investors ponder the bright outlook for 2015. Year-to-date the stock is up more than 40%.

For fiscal 2015, Applied expects the industry growth to be driven by the technology transitions to FinFET and 3D NAND. The company believes that its unique position in precision materials engineering will help it outgrow the industry. Despite the weak guidance for Q1 2015, Applied expects to increase revenue across all of its segments, gain share in SSG and further improve operating margin, in fiscal 2015.

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Our price estimate of $22 for Applied Materials is approximately 15% lower than the current market price.

See our complete analysis of Applied Materials here

Merger With Tokyo Electron To Close In Q1’15

Applied announced its merger with Tokyo Electron in an all-stock deal valued at more than $7 billion in September last year. While the transaction was expected to close in fiscal 2014, Applied suggested the completion may occur in Q1 2015 now. The joint integration team is working closely together to make the merger a success and are working hard to obtain the remaining approvals.

Both Applied and Tokyo Electron supply equipment used to manufacture semiconductors, flat-panel displays and solar photovoltaic products. U.S.-based Applied Materials is the world’s largest maker of semiconductor equipment by sales, followed by ASML Holding NV and Tokyo Electron. [1] With an estimated combined WFE market share of 34%, Applied believes that its merger with Tokyo Electron will help form a stronger entity. Though both companies are among the largest in the industry, they have little overlap in their product offerings. Applied will also benefit from a broader product portfolio, shared R&D costs and lower cost of developing chips.

Improving Semiconductor Demand In 2014; Applied Expects 2015 To Be Stronger

An uncertain macro environment in fiscal 2013 combined with soft demand for consumer devices forced many chip manufacturers to reduce or postpone their expansion plans. According to Gartner’s recent forecast, global semiconductor capital equipment spending declined by 16.1% AND 11.6% IN 2012 AND 2013, respectively, to $37.8 and $33. 4 billion.

However, the accelerated changes in device technology and the adoption of new materials in the industry are expected to re-accelerate demand for semiconductor equipment in the next two years. Gartner estimates capital equipment spending in the semiconductor industry will increase by 17% and 11% in 2014 and 2015 (calendar year), respectively. Rising mobile shipments, a recovering DRAM market, growing NAND demand and the pending technology transitions (22nm and 16 nm, FinFET, and 3D NAND) are key factors driving demand for semiconductor equipment.

Applied remains focused on creating a strong pipeline of new, highly differentiated products to enable future inflections in logic, memory and display. In calendar 2013, it gained 1.4 points of wafer fab equipment market share, ending the year at its highest level since 2006. [2] Applied continues to estimate that Wafer Fab Equipment (WFE) spending will increase 10% to 20% in calendar year 2014. It forecasts 2015 WFE spend to be even higher, driven by the transition to FinFET by TSM and Samsung, more customers investing in 3D NAND, and increasing DRAM spending. As its customers aggressively push factory output, the company also expects expanded opportunities for its AGS business (which was also at a seven year high in fiscal 2014).

Applied believes that, in calendar year 2014, it will gain at-least 3 percentage points of share in CVD and generate 2.5 times the sales (compared to 2012) in etch. Its expects its revenue in etch and CVD, combined with the revenue of Tokyo Electron (see below), to grow by almost 50% in calendar 2014.

Strong Investment In Display Capacity & New Technology Will Drive Future Growth

For fiscal 2014, Applied’s display orders achieved a six year high as the business took advantage of technology inflections and panel-size increases in the TV and mobile display markets. Applied gained share and increased its operating margin to its highest level since 2011. Growing TV demand and mobile investments are two key factors driving growth in the display segment.

Though Applied expects its display revenue pattern to be uneven due to shipment timings, its overall outlook for the display segment remains positive. The company claims that its display business is shaping up as expected, driven by strong investment in capacity additions and new technology.

Applied claims that the attractive price points for 4K TVs are driving a TV refresh cycle, while average screen sizes are growing around twice as fast as historic rates, 1.2 to 2 inches annually. This trend is driving area growth in the 15% range which the company believes is sufficient to support investment in three new Gen 8.5 factories, which are being built in China as its customers compete to meet the growing TV demand. (Read: Applied Materials: Here’s Why China Is An Important Market For The Display Equipment Business)

Additionally, demand for higher-resolution, lower-power screens for mobile devices is also a key growth driver for the display segment. Applied claims to be getting strong orders for this market. The screen resolution is becoming an important differentiator and is leading to significant growth in high definition screens. Applied expects multiple Gen 6 LTPS factories to be built in the next 12 to 18 months to support this demand.

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Notes:
  1. RPT-UPDATE 2- Applied Materials to buy Tokyo Electron, create $29 bln company, Reuters, September 24, 2013 []
  2. Applied Materials’ (AMAT) CEO Gary Dickerson on F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 16, 2014 []