Applied Materials, Inc. (AMAT) reported strong financial results for the third quarter of 2024 today, surpassing analysts’ expectations. The company achieved a record revenue of $6.78 billion, which marked a 5% increase from the same period last year and exceeded the consensus estimate of $6.673 billion. The adjusted earnings per share (EPS) also outperformed expectations, reaching $2.12, compared to the anticipated $2.02 per share. This performance represents a significant improvement from the $1.90 per share reported in the third quarter of 2023.The company’s financial performance was driven by increased demand for its semiconductor equipment, fueled by the ongoing race for AI leadership. Applied Materials generated $2.39 billion in cash from operations during the quarter and returned $1.19 billion to shareholders through share repurchases and dividends.
Meeting the Stringent Tests of Warren Buffett
Warren Buffett, one of the world’s most successful investors, is known for his rigorous approach to selecting companies. Applied Materials currently passes all the criteria of our model based on Buffett, which is based on the book Buffettology, earning a 100% score.
Durable Competitive Advantage
At the core of Buffett’s philosophy is the concept of a “durable competitive advantage.” Applied Materials exhibits this through its consistently high returns on equity (ROE) and total capital (ROTC). With an average ROE of 35.3% over the past decade and 46.5% over the last three years, AMAT significantly outperforms the 15% threshold Buffett typically seeks. Similarly, its ROTC of 23.6% over ten years and 33% over three years far exceeds Buffett’s 12% benchmark, indicating a strong, sustainable competitive position in its industry.
Earnings Predictability and Growth
Buffett favors companies with stable, growing earnings. Applied Materials has shown impressive earnings growth, with its EPS increasing from $0.87 to $8.11 over the past decade. Despite one earnings decline five years ago, the company’s long-term historical EPS growth rate of 24.6% and projected future growth of 15.4% demonstrate the kind of earnings predictability and expansion potential that would attract Buffett’s attention.
Conservative Financing
Applied Materials’ financial health aligns well with Buffett’s preference for conservatively financed companies. With earnings of $7,203.6 million against a debt of $5,463.0 million, AMAT could theoretically pay off its entire debt in less than two years, a sign of strong financial management that Buffett would appreciate.
Efficient Use of Retained Earnings
Buffett looks for management teams that efficiently reinvest earnings to benefit shareholders. Applied Materials passes this test with flying colors, achieving a 22.3% return on retained earnings over the past decade. This indicates that management is adept at allocating capital to drive future growth and shareholder value.
Share Repurchases
As a bonus, Applied Materials has been actively buying back shares, reducing the number of outstanding shares from 916 million to 828 million over the past five years. This aligns with Buffett’s preference for companies that return value to shareholders through stock repurchases.
Attractive Valuation
From a valuation perspective, Applied Materials offers an intriguing proposition. The company’s initial rate of return of 4.31% (based on trailing 12-month EPS) is comparable to the long-term treasury yield of 4.00%. However, with projected earnings growth of 15.4% annually, AMAT’s yield is expected to expand rapidly, making it an attractive investment compared to bonds.
Potential Returns
Using two different methods to calculate potential returns, Validea’s model suggests that investors could expect an average annual return between 12.2% and 23.3% over the next decade, with an average expectation of 17.8%. This range of returns would likely be very appealing to Buffett, who typically seeks a 15% return on his investments.
Applied Materials demonstrates strong alignment with Warren Buffett’s investment criteria as interpreted by Validea’s model. With its durable competitive advantage, consistent earnings growth, efficient use of capital, and attractive valuation, AMAT presents a compelling case as a Buffett-style investment opportunity in the technology sector.
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