Applied Materials (NAS: AMAT) is the world's largest semiconductor equipment manufacturer. If the global economy is strong and the demand for high-tech gadgets is robust, Applied Materials' business will likely be booming. If China's slowdown or European worries weigh on growth, then it may not perform as well.
Today, let's look at three things investors should be watching regarding Applied Materials, as they will provide us better insight into the company.
1. Fabless semiconductor demand
Contracted fabless semiconductor makers Taiwan Semiconductor (NYS: TSM) and United Microelectronics (NYS: UMC) rely on strong smartphone and tablet demand to stay profitable. As long as consumers continue to want these gadgets, Applied Materials' equipment business should benefit.
The good news is this trend is in Applied Materials' favor. According to website GigaOM, smartphone prices dipped to an average selling price of only $135 by late 2011 and had dipped in four consecutive quarters. As smartphones become cheaper, it makes them affordable for a wider swath of consumers. More units being sold presumably equates to higher production capacity and more business for Applied Materials.
2. Solar industry pricing
In 2011, Applied Materials purchased Variant Semiconductor and its solar equipment operations for $4.9 billion. Until now, that purchase hasn't exactly panned out as the company had planned. Polysilicon prices and global demand for solar have plummeted as governments have reined in spending and subsidies on the efficient, clean-energy fuel source.
Despite this, Applied Materials still produced a $0.01 non-GAAP profit from its solar equipment segment in the second quarter. Rather than sitting back and allowing itself to be undercut in pricing by Chinese competitors, the company outlined a plan in the first quarter to move its solar equipment operations from Switzerland to China. The move will mean a short-term black-and-blue mark on earnings, but may give the company a competitive labor-margin edge over U.S.-based solar firms like First Solar (NAS: FSLR) and SunPower (NAS: SPWR) , who don't have the luxury of relying on cheap labor forces to produce their solar products and continue to be undercut on price in many cases by China-based solar firms.
3. Dividend growth
Applied Materials hasn't exactly lit the world on fire with its dividend growth, but it nonetheless has tripled its quarterly payout to $0.09 from $0.03 in just seven years with five dividend hikes along the way.
Source: Dividata. * Estimated annual payout assuming $0.09/quarter.
The company's current payout ratio of just 31% gives its current yield of 3.3% considerable room to head higher. Its most recent quarter featured one of those aforementioned five dividend boosts, and an increase in operating cash flow to 24% of net sales. With nearly $2.2 billion in cash and $220 million in net cash, Applied Materials' strong cash flow should dictate the likelihood of future dividend hikes.
Now that you know what to watch for, it should be easier to analyze Applied Materials' successes and pitfalls in the future and hopefully give you a competitive investing edge.
If you're still craving even more info on Applied Materials, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.
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At the time this article was published Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of First Solar. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that's a chip off the old block.
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