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Nicholas Coppola, CFA
April 24, 2020
As you may have seen earlier this week in your trade confirmations, we recently exited Omnicom Group (OMC) and established a new position in Applied Materials (AMAT).
While Applied Materials may not be a household name for consumers, it’s one of the largest suppliers of equipment for semiconductor manufacturing, and their customers include companies like Samsung and Intel. Their solutions are used in the manufacturing of nearly every chip in the world, which make our laptops, desktops, and smart phones work, and enable mega-trends in cloud computing, artificial intelligence, and the ‘internet of things.’ With the consumption of data projected to dramatically increase over the long-term, we like that Applied Materials maintains a strong position in a critical part of technology infrastructure. We also like that the company operates in a consolidated industry and has a wide diversity of products and customers, allowing for multiple ways to potentially win.
We also believe that that the company is competitively advantaged in a number of ways. First, based on their scale, the company is able to invest heavily in R&D. Applied Materials has been spending more than ~$2B annually on R&D and is highly focused on developing cutting edge technologies, including new architectures, structures and materials. We’d also point out that the company has an attractive services business that supports their industry-leading installed base of more than 42,500 manufacturing systems across the world. Importantly, this services business is less cyclical than their equipment sales and keeps the company close to their customers while strengthening relationships.
In regard to short-term risks, we acknowledge that the semiconductor equipment industry has historically been sensitive to the economic cycle, and we expect a significant impact from COVID-19 as their customers, impacted by a slower economy, cut back on capital expenditures. That said, we think that the longer-term growth trajectory remains positive based on structural trends, and we believe that the downturn has allowed us to acquire the stock at an attractive price. Note that we purchased AMAT at ~15.8x trailing twelve months earnings, which at the time of the transaction, compared to ~18.6x for the broader S&P 500. And of course, we view Applied Materials as a far better than average company.
We thank you again for your continued trust during this difficult time. And as always, please let us know if you have any questions about recent trades or your broader portfolio.
Nicholas Coppola, CFA
Senior Portfolio Manager