Applied Materials Inc. (NASDAQ: AMAT), the world's largest supplier of photovoltaic cell (PV) manufacturing equipment, looks to be on the ascendant. The stock could touch $20 soon.
Applied Materials closed the calendar year 2008, with one acquisition and one divestiture. The company expanded its solar cell manufacturing technologies by completing the acquisition of Baccini, a supplier of automated metallization and test systems for manufacturing crystalline silicon (c-Si) photovoltaic (PV) cells. It sold the refurbished equipment business to OEM Surplus Inc, a unit of OEM Group. So far in 2009, the company has acquired Advent Solar Inc, an Albuquerque-based manufacturer of silicon-based photovoltaic (PV) solar cells and modules. It is also rumored to be considering the acquisition of Renewable Energy Corporation ASA, a Sandvika-based manufacturer of solar grade silicon.
The company has also announced that it has decided to acquire Semitool (NASDAQ:SMTL) the maker of multi-chamber single-wafer and batch wet chemical processing equipment used in the fabrication of semiconductor devices. The company is being acquired by Applied Materials for $11.00 per share in cash. The $364 million deal is small enough that it should not bleed too much from Applied Materials' shares as its market cap is some $17 billion and now that it has earnings behind it. Applied will pay $11 per share — a premium over the recent close of $7.77 — in the all-cash tender offer for Semitool, a pioneer in electrochemical plating and a supplier of wafer surface preparation equipment. Applied said it will begin the tender offer "promptly" and expects it to close by the end of calendar 2009.
Semitool recorded revenues of $238.6 million in the fiscal year ended September 2008, an increase of 10.9% over 2007. The company's operating profit was $10 million in fiscal 2008, as compared to an operating profit of $2.6 million in 2007. Its net profit was $6 million in fiscal 2008, an increase of 15.4% over 2007. Semitool offered guidance that can be interpolated to Applied Materials. Shipments for the coming quarter are expected to range from $47 million to $50 million; and management expects to report revenue in a range of between $190 million to $210 million for fiscal-2010.
Semitool will become part of Applied's Silicon Systems Group (SSG). Applied Materials and Semitool have a strong track record of collaborating to develop equipment solutions for leading chipmakers. Applied Materials can accelerate the global adoption of the technologies Semitool has developed.
The acquisition will give Applied a fresh start in copper deposition, after its internal effort came up short and was abandoned two years ago, for reasons which have never been fully explained. With Semitool controlling 24% of the copper double-damascene deposition market on revenues of $30 million in 2008, against Novellus's dominant 73.6% share with sales of $92.4 million, the stage is set for an Applied/Semitool vs. Novellus copper showdown.
In electroplating of gold and other metals used in creating bumps for flip-chip packaging, Semitool has a much larger share of 86% on 2008 revenues of $63 million, followed by a 14% share held by Nexx Systems Inc. (Billerica, Mass.). In the nascent field of filling TSVs for 3-D interconnects, Semitool and Ebara Corp. (Haneda, Japan) each have around 34% shares.
Why I suggest AMAT share could touch $20
I see the standalone 1 year target prices of SMTL and AMAT at $13 and $18 respectively. So, the combined entities' proforma share price stands at $17.57 share (SMTL's 32.74 million shares at $13 per share and AMAT's 1330 million shares at $18).
The reason for such a high target price lies in increasing demand for chipmakers' products. PC makers have been building up inventory in anticipation of strong end-of-year demand and the launch of Windows 7. I believe that inventory builds for notebooks and netbooks have been particularly strong, and other chipmakers that likely benefited from this trend in the third quarter include Intersil (ISIL), Integrated Device Technology (IDTI) , and Maxim Integrated Products (MXIM). I think that demand for industrial-related chips have been improving significantly recently. The industrial semiconductor market had been particularly weak but is finally experiencing the rebound seen by other chip segments, such as wireless and PCs.
AMAT could realize synergies to the tune of $2.43 per share. Consequently, I see the combined entities' 1 year target price share price at $20.
