What AMAT’s Price Ratios Say about Its Valuation



AMAT’s price ratios

In the previous part of this series, we saw that Applied Materials’ (AMAT) stock price is seeing a bearish trend in the short term after witnessing strong growth in the last 11 months. The technical indicators are used by short-term investors who trade on the stock.

As value investor Ben Graham noted, “Price is what you pay, value is what you get.” Long-term investors rely on a company’s fundamental valuation to determine whether the current stock price fairly values the stock. A company’s price ratio helps us compare its stock price with its fundamentals such as earnings, sales, and cash flows to understand the true value of the stock.

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Price-to-sales ratio

A company’s PS (price-to-sales) ratio tells us the amount investors are willing to pay for every dollar of the company’s sales. On August 7, 2017, AMAT had a PS ratio of ~3.7x, which is higher than Lam Research’s (LRCX) PS ratio of ~3.1x but lower than KLA-Tencor’s (KLAC) PS ratio of ~4.2x.

LRCX’s PS ratio is lower even though its sales are growing faster than the other two companies. Its stock price has already factored in high sales growth.

Price-to-earnings ratio

The PE (price-to-earnings) ratio is the most widely used ratio by investors, as it tells us the amount investors are willing to pay per dollar of EPS (earnings per share). EPS is the amount that is directly available to shareholders after deducting all expenses. Hence, the PE ratio is the most direct ratio to understand the value of a share. A forward PE ratio is based on the analysts’ EPS estimates for the next four quarters.

On August 7, 2017, AMAT had a forward PE ratio of ~14.2x, which is higher than LRCX’s and KLAC’s PE ratios of ~12.3x and ~13.7x, respectively. All three companies’ PE ratios are lower than the semiconductor industry’s average of 24.2x and the US market average of 23.6x.

The lower PE ratio indicates that AMAT is undervalued relative to the industry. Analysts are bullish on AMAT and expect its EPS to grow 23.9% in the coming 12 months.

Price-to-FCF ratio

A company’s price-to-FCF (free cash flow) ratio tells us the amount investors are willing to pay for every dollar of FCF. On August 7, 2017, AMAT had a price-to-FCF ratio of 18x, which is higher than KLAC’s 20.7x but lower than LRCX’s ~15.4x.

Although AMAT’s stock price has increased 64% in the past 12 months, it is still undervalued as its fundamentals such as sales and earnings grew at a decent rate. The stock may see selling pressure in the short term, but it could grow in the long term.


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