JERRY JORDAN
PORTFOLIO MANAGER
JORDAN OPPORTUNITY FUND (JORDX)

COMPANY: Applied Materials
TICKER: AMAT (Nasdaq)
PRICE: $17.51 (as of 4 p.m. Friday)
52-WEEK RANGE: $14.33-$21.06
MARKET CAPITALIZATION: $27.78 billion

What does Applied Materials do?

They are the largest supplier of semiconductor equipment in the world. They supply to Intel, Texas Instruments, etc. All the main players use their products to make their chips. They also supply to manufacturers of flat panel displays. One of their biggest groups of customers are the Taiwanese semiconductor foundries (for example, United Microelectronics).

Why do you like the stock?

Firstly, it’s become very cheap. It’ll earn north of $1 this year. From a cyclical perspective, it’s almost the cheapest it’s been in 20 years. This is a cyclical business and so you have ups and downs. Cyclical stocks tend to peak 12 months in front of the peak of the cycle, and bottom 12 months in front of the bottom of the cycle. People seem to sell into the good news and rally in bad times. I would argue that this is a stock that bottomed at $14 a share early last year. The expectation is that the stock price will start to roll up again right now. If we look at it from a fundamentals perspective, this quarter should be their first that’s up on earnings and revenue year-on-year, after three down quarters previously. Their margins are flattening out and improving, and what’s particularly interesting is that margins held up very well in the down cycle, which lasted about six quarters. We’re now at the beginning of a new technology upgrade cycle, which means increased demand for semi-conductors going forward

What’s driving the upgrade cycle?

Now is the first time in possibly a decade or more where we have a number of major technology ramps occurring. Sony’s new Playstation and Microsoft’s Vista software [which drives PC production] are both being released in the next year. You’ve also got a global rollout of flat panel televisions, which is an incredibly fast growing market worldwide. All of those applications use semiconductor chips.

What do you think the stock’s worth?

In an average up-cycle of revenue for semiconductor equipment, you see a doubling of revenue. I think that they can generate $12 billion to $14 billion in revenue in the peak 12-month period, coming up in the next 24 months. As that plays out, I think they’ll earn $1.50 to $2 for the period. If you put a 15 multiple on that, which is reasonable, you get a $30 stock. I think that it can hit that level over the next 18 months.

Here’s the beauty of this kind of stock [i.e., semiconductor equipment manufacturers]. I don’t have to bet which particular company will have the hot new chip set. It’s not a bet on Texas Instruments versus Intel. All I’m betting is that I’m right about the overall demand for the product. It’s a backdoor way of getting in on the growth.

What are the risks?

The obvious risk is a global recession, or a big slowdown that scares consumers. Most of the up-tick in demand comes from consumers’ demand for products that use chips, so it’s a problem if that demand slows. But given that the industry is already at the trough of the cycle, you wouldn’t see earnings deteriorate much anyway, I don’t think.