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Assessing Applied Materials’ Cash for the Long Term

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AMAT’s cash flow

In fiscal 2Q16, Applied Materials (AMAT) generated $481 million in cash from operating activities, which is almost double the cash flow it generated in fiscal 2Q15. It spent $47 million on capital expenditure, $900 million on share buybacks, and $113 million on dividend payments. The company has completed 95% of its program to return $3 billion to shareholders and plans to complete the remaining 5% in fiscal 3Q16. If possible, it plans to return some excess cash to shareholders.

By comparison, KLA-Tencor’s (KLAC) operating cash flow halved, and Lam Research’s (LRCX) cash flow fell by 4.2% YoY (year-over-year) in fiscal 3Q16.

Assessing Applied Materials' Cash for the Long Term

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Cash reserves

As of May 1, 2016, AMAT’s cash reserves stood at over $2.6 billion, as compared to its long-term debt of $3.3 billion. This indicates that the company does not have sufficient funds to repay its long-term debt, and this position limits its ability to make large investments.

However, its current assets are three times its current liabilities, indicating that it has sufficient reserves to fund its day-to-day operations and withstand short-term headwinds.

The Semiconductor ETF (SMH) has exposure in 26 semiconductor stocks, including ~4.7% exposure in AMAT and 2.6% in LRCX.

Pending peer merger

KLA-Tencor has higher long-term debt than cash reserves. However, Lam Research has a strong cash and debt position, with four times as much cash as debt. This makes Lam more stable to make large investments for the long term. Lam is also merging with KLA-Tencor in a $10.6 billion deal, which will increase the combined company’s leverage position just like that of Fairchild and ON Semiconductor (ON).

So while AMAT is financially stable in the short term, it does not have the liquidity to undertake long-term investment. But the company is optimistic about its fiscal 3Q16 and fiscal 2016 outlook and expects growth to accelerate in the long term.

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