Applied Materials is making a forceful procurement

Intel – supplier Applied Materials (ticker: AMAT) is purchasing semiconductor equipment producer Kokusai Electric for $2.2 billion in cash from KKR and Co. (KKR). Applied is paying under eight times earnings before interest, taxes, depreciation and amortization, or Ebitda, a big discount to its own valuation numerous. That has investors excited, and Applied Materials stock was up almost 4% in Monday morning trading.

The deal strengthens Applied Materials’ footprint in Asia and adds new processing technology to the organization’s item lineup.

“Kokusai has an installed base of over 10,000 systems, which provides the foundation for a healthy service business,” said Applied Materials CEO Gary Dickerson on the company’s Monday morning conference call reviewing the deal. “These high-productivity systems are especially enabling in DRAM and NAND [memory chip] manufacturing.”

“It’s challenging to make an acquisition in a consolidated industry such as this,” Sidarth Kapoor from hedge fund Avasar Partners said. “But it appears it gives [Applied] presence in batch wafer processing where their target excels and [Applied] lags.”

Regulatory reviews could be a hazard to the deal, yet it shows up too soon to tell if the deal will increase market concentration in a segment of the semiconductor capital equipment industry. “On a regulatory basis, we have no insight at this time,” wrote Stifel analyst Patrick Ho in a Monday research report. “But given the scale of this potential deal, we don’t see it running into as much of a regulatory standoff as Applied experienced when it tried to purchase Tokyo Electron [8305.Japan].”

It’s been a decent year for semiconductor stocks so far in 2019. The Philadelphia Stock Exchange Semiconductor Index has returned over 30% year to date. Applied stock is up 43% year to date, obviously better than the 14% return of the Dow Jones Industrial Average. Furthermore, Wall Street thinks there are more gains for Applied shareholders later on.

“We think the transaction is a positive for [Applied],” wrote RBC Capital Markets analyst Mitch Steves in a Monday research report. He expects the deal will be accretive to Applied’s earnings, and he has an Outperform rating on the stock.

“The acquisition expands the scope of [Applied’s] product portfolio and increases scale,” said Pierre Ferragu of New Street Research. “These are two critical success factors” in semiconductor capital equipment.

Almost 80% of investigators covering the organization rate shares Buy, around 25 percentage points better than the average Buy-rating ratio for stocks in the Dow. Examiners’ average target cost is about $52, 5% higher than recent levels, however current targets do exclude income from the procured resource yet.

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