Time to Jump On Applied Materials

We’ve been holding off adding Applied Materials (NASDAQ:AMAT) for the last several weeks in hopes that we’d be presented with a more attractive entry point. That price level has materialized, and now’s the time to add this semiconductor giant to our portfolio.

But first, I want to tell you why this stock fits into our investment mold.

We’ve talked a lot about Applied Materials lately, but most recently it’s been in the context of stock charts and timing. While charting is an exceptionally valuable tool for timing entries and exits, it’s never the sole basis for investing in a Rhino Stock – instead, the fundamentals are key.

And in Applied’s case, those fundamentals are duly impressive. From the emergent technologies coming out of its research and development department to the consistent revenue streams from Applied’s semiconductor equipment business, this firm has the value case and growth prospects to warrant a significantly higher share price.

The Leader in Nanomanufacturing

In essence, Applied Materials is one of the biggest players in the nanomanufacturing market – a fancy word for the business of building small.

The company’s core business includes fabrication tools for chip manufacturers, components for flat-screen displays, and even solar panel manufacturing. Through significant growth since its founding in 1967, Applied has carved itself a large competitive advantage over its competition. That growth has been fuelled by huge research and development spending – around $1 billion annually – spending that isn’t easy for competitors to compete against. The end result is a store of intellectual property that spans across Applied Materials’ businesses and gives the company one of the biggest reaches of any technology firm.

Today, Applied is the biggest supplier to the global semiconductor industry – a $17 billion market that the company currently controls more than 15% of according to a recent study by Gartner. And with customers like Intel, Toshiba, and Texas Instruments, it’s no surprise that this stock has built itself an unmatched reputation in semiconductor fabrication.

In fact, if you’re reading this Rhino Alert on a flat-screen monitor – or using nearly any electronic device, for that matter – there’s a good chance you’re making use of Applied’s technology.

Applied’s position in semiconductors is impressive, but the further reaching implications shouldn’t be missed… With a number of breakthroughs forthcoming on the semiconductor front, the industry is on the verge of significant growth; and increasingly complex and production-intense chip technologies translate into more profits for our pick.

That reach also makes for higher switching costs for its installed base. When a major chipmaker like Intel uses Applied Materials’ processes or technologies, it’s extremely expensive and time intensive to switch to a competitor’s offerings.

That chipmaking prowess has been transferred over to Applied’s flat-panel display segment in recent years. Because many of the technologies used to fabricate semiconductors are similar to those used in the flat-panel manufacturing process, Applied was able to hit the ground running with its entrance into this high-growth segment of the tech market.

Of course, flat-panels haven’t been the only area where Applied Materials was able to apply its existing intellectual property to new businesses. Starting in 2006, the company began making acquisitions for its burgeoning solar panel business. Today, its solar photovoltaic (PV) segment is developing some exciting new high-efficiency panels that stand to make solar energy commercially viable on a large scale.

Despite all of the prospects that Applied Materials is enjoying, this stock has faced some serious setbacks in the last couple of years. The semiconductor and flat-panel industries have been on a cold streak of late, hampered by excess inventory and significant declines in consumer spending. Likewise, solar has lost some of the cachet it enjoyed in late 2007 as efficiency concerns and high capital requirements scared potential customers away.

But economic tailwinds are starting to form in all three segments as consumer spending begins to perk back up and controversy over fossil fuels grows – especially in the wake of the Deepwater Horizon spill in the Gulf of Mexico.

Financial Stability in Tough Times

Even though Applied Materials has faced challenging economics in the last year, the company’s strong financial position has kept the stock from floundering. At present, Applied’s balance sheet is impressive – with more than $3.6 billion in cash and only $207 million in debt right now, the company has more than enough liquidity to battle through less than ideal markets.

From a profitability standpoint, Applied has historically been one of the best companies in the industry. That changed in fiscal 2009 when the company posted a loss of 23 cents per share versus profits of 97 cents for the same quarter in 2008. Not surprisingly, Applied’s poor performance was the result of slowed revenues for the year amid billion-dollar R&D costs. In the long-run, keeping research and development spend high should pay off for Applied’s shareholders even if it led to short-term losses.

This year, the company’s on track to deliver substantial revenue growth.

That said, the factors that bode well for a resurgence in Applied Materials’ share price have yet to take effect in any meaningful way – that makes right now an excellent time to become a shareholder in this tech giant. I’m adding Applied Materials to the Rhino Stock Report’s portfolio at its current market price. That should be reflected online in our live portfolio by the day’s end.

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