Q. I own shares of Applied Materials Inc. What does the future hold?
M.L., via the Internet
A. With the dark clouds of the recession and technology bust dissipating, the sun is again shining on this supplier of chip-building machines to the semiconductor industry.
Worldwide sales of the equipment segment that it dominates should rise 64 percent to $37.3 billion this year, according to estimates of the Gartner Group research firm.
The company earned $373 million during its most recent quarter, beating expectations and atoning for a $62 million loss a year earlier when it took a restructuring charge. Management expects 5 to 10 percent growth in orders during the current quarter, with more than half of the firm’s total sales outside the U.S.
Applied Materials has strong products, market share and management. It is also well positioned to take advantage of the semiconductor industry’s move toward larger silicon wafers.
Yet even upbeat news is taken with a grain of salt in this industry so reliant upon the confidence of firms in the volatile semiconductor business. Shares of Applied Materials (AMAT) are down 28 percent this year after last year’s 72 percent gain.
Workforce reductions have changed the operations of the firm. For example, at its Austin, Texas, factory, it now has 2,000 fewer employees than in 2000 but is turning out the same number of machines that it built during that boom year.
The strong Applied Materials balance sheet permits it to outspend rivals on research and development, as well as acquisitions. It recently made a cash purchase of Torex, developer of a thermal film deposition technology used in semiconductor technology. Last year it acquired Boxer Cross, a maker of electrical measurement equipment.
Management is well respected. Michael Splinter, a 20-year veteran of Intel Corp., has replaced former chief executive James Morgan and former president Dan Mayden.
The consensus recommendation on Applied Materials stock is midway between a “buy” and a “hold,” according to the Boston-based First Call research firm. That consists of three “strong buys,” 11 “buys,” 17 “holds” and one “sell.”
Because of its recent turnaround, Applied Materials earnings are expected to increase a dramatic 559 percent this year versus 149 percent for the semiconductor industry. Next year’s projected 41 percent rise compares with 24 percent forecast for its peers.
The five-year annualized growth projection for the company is 17 percent versus 18 percent industrywide.
Q. Why do companies split their stock, and is this good for investors?
T.S., via the Internet
A. While a stock split doesn’t affect the overall value of your investment, it does change the number of shares you own.
Companies often split their stock when they believe the stock price exceeds the amount smaller investors are willing to pay for it. So, if you own 100 shares of a company trading at $100 a share and it declares a two-for-one stock split, you wind up owning 200 shares valued at $50 a share after the split.
Studies show that after a split the share price tends to grow more quickly than it would have before the split. Stocks can be split many different ways, such as 3-for-2 or 5-for-4. There can also be reverse splits, such as 1-for-10, if a company thinks its stock price is too low, or to keep a minimum share price necessary for listing on a stock exchange.
ChevronTexaco (CVX) and Qualcomm (QCOM) recently announced stock splits.
“A stock split won’t overcome declining earnings and sales momentum,” cautioned Jon Johnson, chief market strategist with StockSplits.net in Houston. “When you see companies split their stock too many times, it can be a problem because the float [number of shares available] gets too big and you can’t continue the growth in the share price.”
Apollo Group (APOL) and Federal Express (FDX) appear ripe to announce stock splits, Johnson said.
Q. I own Van Kampen Emerging Growth Fund and it hasn’t rebounded since 2001. What is your opinion of this fund?
M.W., Worcester, Mass.
A. It has fallen on hard times.
The fund’s prior success in finding companies with strong earnings momentum helped it attract more and more assets. It didn’t close its doors to new investors despite this prolonged growth spurt.
The ballooning asset size made it less nimble and less capable of executing its strategy. It began to buy larger-capitalization stocks, and the recent bear market hit its portfolio very hard.
The $4 billion Van Kampen Emerging Growth Fund “A” shares (ACEGX) gained 3 percent over the past 12 months to rank in the lowest one-third of large growth funds. Its three-year annualized decline of 10 percent put it in the bottom 10 percent of its peers.
Total asset size for all of it’s share classes is $7 billion.
“Gary Lewis, portfolio manager since 1989, has been making some headway in solving the fund’s problems, but I wouldn’t bet on this fund turning around,” said Todd Trubey, analyst with Morningstar Inc. in Chicago. “He really has to prove that his longtime strategy can work with a large asset base in large-cap stocks, and he hasn’t done so yet.”
Lewis, who also manages several other funds for Van Kampen, has stopped making big bets on specific sectors and companies. Instead, he spreads around his sector-weighting in accordance with market benchmarks.
Investors who bought shares before 1999 probably have a capital gain and should investigate their tax liability before deciding whether to sell, said Trubey. Those buying after 1999 might do well to consider selling and investing elsewhere, he added.
Hardware represents about one-fourth of the fund’s portfolio.
Van Kampen Emerging Growth Fund requires a 5.75 percent “load” (sales charge) and $1,000 minimum initial investment. Its annual expense ratio is a reasonable 1.15 percent.
Q. I see the term “pro forma” used in news stories about company earnings. What exactly does this mean?
D.P., via the Internet
A. Pro forma means “as if,” according to Dan Noll, director of accounting standards for the American Institute for Certified Public Accountants in New York City.
For example, a company may state what its bottom line would have been if it didn’t include the depreciation of a building, the restructuring of its assets or the acquisition of another company.
Investors should be aware that while some companies use pro forma information to clarify their situations, others use it simply to remove anything that might not look good in their financials. This can provide a “pie in the sky” positive spin on results.
Such modified pro forma information is separate from the financial statements that all public companies in the United States must publish in accordance with generally accepted accounting principles (GAAP). While all companies must provide GAAP financials and these are what really count, not all firms provide pro forma earnings information.
“If a company is going to use pro forma numbers in a press release or elsewhere, it is required to reconcile them to the GAAP numbers so that the investor completely understands the whole picture,” said Noll.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.
