Is Applied Materials a Good Choice for Value Investors?
Zacks Equity Research
Updated
Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Applied Materials, Inc. AMAT stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Applied Materials has a trailing twelve months PE ratio of 19.91, as you can see in the chart below:
This level is marginally lower than the market at large, as the PE for the S&P 500 stands at about 20.11.
Per the chart, historically – the company’s PE multiple has been higher than the market more often than not. This indicates some possible upside to price in the near future.
If we delve deeper into the PE ratio’s inputs (Price and Earnings), we will see that AMAT’s price has followed the earnings trend of the company, albeit with a slight lag. This behavior is especially pronounced since earnings touched the period bottom in mid-2013. We believe that the recent strong earnings growth of the company has still not been priced fully by the market, and hence, there might be some room for the stock to appreciate in the near future.
Notably, the stock’s PE also compares favorably with the Zacks classified Computer & Technology sector’s trailing twelve months PE ratio, which stands at 22.08. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Applied Materials has a forward PE ratio (price relative to this year’s earnings) of just 14.45, so it is fair to say that a slightly more value-oriented path may be ahead for Applied Materials stock in the near term too.
PEG Ratio
While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate). The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.
Applied Materials’ PEG ratio stands at 1.04, compared with the Zacks categorized Semiconductor Equipment – Wafer Fabrication industry average of 1.29. This suggests a decent undervalued trading relative to its earnings growth potential right now.
Broad Value Outlook
In aggregate, Applied Materials currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Applied Materials a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, Applied Materials’ P/S ratio, which compares a stock’s price to its total sales, stands at 2.96. This compares favorably with the industry’s ratio of 4.08. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings. Additionally, the company’s P/CF ratio (another great indicator of value) comes in at 13.87, which is better than the industry average of 17.55. Clearly, AMAT is a solid choice on the value front from multiple angles.
What About the Stock Overall?
While Applied Materials might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘A’. This gives AMAT a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been somewhat encouraging. The current quarter has seen one estimate go higher in the past sixty days compared to no downward revisions, while the full year estimate has seen two upward and one downward revision in the same time period.
This has had a slightly positive impact on the consensus estimate, as the current quarter consensus estimate has remained stable in the past two months, while the full year estimate has climbed 1.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Applied Materials, Inc. Price and Consensus
Applied Materials, Inc. Price and Consensus | Applied Materials, Inc. Quote
However, this somewhat bullish trend has likely not yet been reflected in the stock, as we have just a Zacks Rank #3 (Hold), which indicates expectations of in-line performance in the near term.
Bottom Line
Applied Materials is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite having a Zacks Rank #3, the stock belongs to an industry which is ranked among the Top 7%, which indicates that broader factors are favorable for the company. Further, over the past two years, the Zacks categorized Semiconductor Equipment – Wafer Fabrication industry’s performance has clearly outperformed the broader market, as you can see below:
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
