Like my #6 pick Sharp, Applied Materials provides investors a way to profit from the spectacular growth of the solar industry without the incredible volatility of the solar sector. Unlike Sharp, however, AMAT is farter up the value chain, supplying technology and equipment to Solar manufacturers.
Their strategy is to "become the leading equipment supplier to the solar industry." I find their broad-based strategy of acquisitions in the solar supply sector attractive, because I feel that AMAT’s size, financial strength, and reputation in the chip industry should give customers the confidence they need to spend billions of dollars on equipment from AMAT which they might not have if they were buying from the acquired firm. In other words, the very fact of acquisition should add value to the technology of small acquired firms. When I asked a lawyer who used to work at AMAT what her impression was, one of her comments was "From a legal negotiating perspective, I found it almost boring (i.e. without challenge) because suppliers and partners would typically cave to our terms given our leadership position in the market." That probably has not hurt, either.
Thin Film
Recent acquisition in this area include Baccini ($334M, January 2008), HCT Shaping Systems ($483M, Aug 2007), and Applied Films ($464M, May 2006.) These acquisitions have allowed AMAT to supply entire turnkey production lines for thin film solar, which they call their SunFab. A 500MW facility was recently ordered by a new Chinese solar manufacturer. Unlike solar manufacturers, AMAT stands to gain by increased Chinese competition, so long as they can continue to supply the fabs.
Currently, AMAT is weathering a decline in demand for their core silicon manufacturing products. This is good news for investors interested in their solar business, because it means that we do not need to pay as much for the non-green chip manufacturing.
Too Many TVs
However, considerable revenues and profits come from LCD manufacture, an industry also of little interest to clean energy investors (except in the sense that LCD TVs are much more energy efficient that Plasma displays.) After Philips and Sharp, investors following this series will note that this is now the third company with considerable exposure to the LCD Television market. LCDs have seen spectacular growth in recent years, but much of that growth has doubtless been driven by a booming world economy. As a luxury item, sales of new giant flat panel TVs will be quick to suffer from any global slowdown, and this concentration of companies involved in LCD manufacture lessens the protection from diversification investors can get buy buying companies like those in this series, with large clean energy operations as part of a diversified portfolio of businesses.
Investors might choose to ameliorate this risk by waiting for a slump in the market for LCD TVs before buying all three of these companies, or at least buying them slowly over time.
Other Clean Energy Technologies
AMAT also provides some exposure to other interesting clean energy technologies. Their Glass Coating Products are used to deposit the special layers used to reduce heat gain or loss through low-e windows. They are also working to apply their manufacturing prowess to the emerging Organic LED technology, an exciting but emerging sector of energy efficient lighting. As AMAT says on their website, potential uses of OLEDs are not completely defined. In that sort of situation, I prefer to get exposure to the technology through a company I can feel confident will be able to apply its expertise no matter what the final uses turn out to be.
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DISCLOSURE: Tom Konrad and/or his clients have long positions in AMAT, PHG, and SHCAY.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
