2. Applied Materials (AMAT) sells nano-manufacturing equipment to semiconductor, flat-panel-display and solar companies.
Fundamentals: Applied Materials' 12-month sales have surged 90%. Fiscal fourth-quarter adjusted profit multiplied to $476 million, or 36 cents a share, from $155 million, or 11 cents, in the year-earlier quarter. Revenue soared 89% to $2.9 billion. The operating margin more than doubled from 11% to 24%. Applied Materials has a superlative balance sheet, with $2.6 billion of cash and $206 million of debt, converting to a 1.5 quick ratio and a minuscule debt-to-equity ratio.
Valuation: Applied Materials' stock trades at a forward earnings multiple of 10, a book value multiple of 2.3, a sales multiple of 1.8 and a cash flow multiple of 10, 29%, 43%, 48% and 27% discounts to semiconductor industry averages. The stock's PEG ratio of 0.3 signals a 70% discount to estimated long-term fair value. However, a trailing earnings multiple of nearly 19 reflects only a modest discount to the company's five-year average earnings multiple of 20.Fair Value: Morningstar projects fair value at $22, suggesting 68% of potential upside.
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