Applied Materials vs. Entegris: Which Semiconductor Equipment & Materials Stock is a Better Buy?

Applied Materials, Inc. (AMAT) in Santa Clara, Calif., provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three segments: Semiconductor Systems; Applied Global Services; and Display and Adjacent Markets. In comparison,  Billerica, Mass.-based Entegris, Inc. (ENTG) develops, manufactures, and supplies micro contamination control products, specialty chemicals, and advanced materials handling solutions. It operates through three segments: Specialty Chemicals and Engineered Materials; Microcontamination Control; and Advanced Materials Handling.

Semiconductor equipment companies have been thriving on an exponential increase in chip demand, with the world moving to more remote work structures and governments taking measures to increase the use of electric vehicles (EVs). While demand is rising, the shortage of semiconductors, which is being fueled by the pandemic interruptions, is driving up prices for the commodity. Moreover, with the increasing use of cloud computing, 5G, and AI, the demand for semiconductors should keep growing. According to a SEMI report, global semiconductor equipment billings increased a robust 38% year-over-year to $26.80 billion in the third quarter of 2021. Therefore, both AMAT and ENTG should benefit.

While AMAT stock has gained 4.4% in price over the past month, ENTG generated negative returns. Also, AMAT’s 10.2% gains over the past three months are significantly higher than ENTG’s 1.5% returns. Also,  AMAT is the clear winner with 85% price gains versus ENTG’s 42.8% returns in terms of the past year’s performance.

Click here to checkout our Semiconductor Industry Report 

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On September 8, 2021, AMAT introduced new technologies and capabilities to help its customers accelerate their technology roadmaps for heterogeneous chip design and integration. Nirmalya Maity, Corporate Vice President of Advanced Packaging at AMAT, said, “Through technology co-optimization and collaboration with others in the industry, we are building an ecosystem that can accelerate our customers’ PPACt roadmaps and create exciting new growth opportunities for Applied.”

On December 15,  ENTG and CMC Materials, Inc. (CCMP) announced a merger agreement under which Entegris will acquire CMC Materials in a cash and stock transaction with an enterprise value of approximately $6.50 billion. Bertrand Loy, President and CEO of ENTG, said, “We believe the acquisition will allow us to unlock significant growth through enhanced innovation, scale and execution.”

Recent Financial Results

AMAT’s revenues increased 31% year-over-year to $6.12 billion for its fiscal fourth quarter, ended October 31, 2021. The company’s non-GAAP operating income grew 53.1% year-over-year to $2.03 billion, while its non-GAAP net income came in at $1.76 billion, representing a 53% year-over-year increase. Also, its non-GAAP EPS was  $1.94, up 55% year-over-year.

ENTG’s revenues increased 20% year-over-year to $579.49 million for its fiscal third quarter, ended October 2, 2021. The company’s non-GAAP operating income grew 25.6% year-over-year to $152.70 million, while its non-GAAP net income came in at $125.38 million representing a 37.1% year-over-year increase. Also, its non-GAAP EPS was  $0.92, up 37% year-over-year.

Past and Expected Financial Performance

AMAT’s tangible book value and levered FCF have grown at CAGRs of 38.5% and 26.7%, respectively, over the past three years. Analysts expect AMAT’s revenue to increase 14.5% in the current year and 6% next year. The company’s EPS is expected to grow 33.8% in the current quarter and 19.6% next quarter. Furthermore, its EPS is expected to grow at a 16.5% rate per annum over the next five years.

In comparison, ENTG’s tangible book value and levered FCF have grown at CAGRs of 36.8% and 19.5%, respectively, over the past three years. The company’s revenue is expected to increase 21.3% in the current year and 15% next year. Its EPS is expected to grow 25.4% in the current quarter and 27.1% next quarter. And ENTG's EPS is expected to grow at a 21.5% rate per annum over the next five years.

Profitability

AMAT’s trailing-12-month revenue is 10.58 times what ENTG generates. AMAT is also more profitable, with gross profit and net income margins of 47.37% and 25.53%, respectively, compared to ENTG’s 45.66% and 17.31%.

Furthermore, AMAT’s 51.59%, 18.83%, and 26.46% respective ROE, ROA, and ROTC are higher than ENTG’s 25.92%, 10.90%, and 12.56%.

Valuation

In terms of forward non-GAAP P/E, ENTG is currently trading at 41.94x, which is 109.4% higher than AMAT’s 20.03x. Furthermore, ENTG’s 2.31x forward non-GAAP PEG ratio is 89.3% higher than AMAT’s 1.22x.

So, AMAT is relatively affordable here.

POWR Ratings

AMAT has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, ENTG has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

AMAT has a B grade for Quality. This is justified given AMAT's 14.39% trailing-12-month levered FCF margin, which is 22.8% higher than the 11.72% industry average. In contrast, ENTG has a Quality grade of C, which is in sync with its 10.64% trailing-12-month levered FCF margin, which is 9.2% lower than the 11.72% industry average.

Moreover, AMAT has a C grade for Value, which is consistent with its 1.22x forward non-GAAP PEG, which is 29.6% lower than the 1.73x industry average. However, ENTG has a D grade for Value, which is in sync with its 2.31x forward EV/EBITDA, which is 33.8% higher than the 1.73x industry average.

Of the 98 stocks in the A-rated Semiconductor & Wireless Chip industry, AMAT is ranked #37. In comparison, ENTG is ranked #79.

Beyond what I have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the AMAT ratings. Also, get all the ENTG ratings here.

The Winner

The semiconductor equipment space is booming with rising demand for advanced technologies. And while both AMAT and ENTG are expected to gain, we think it is better to bet on AMAT because of its lower valuation and higher profitability.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.

Click here to checkout our Semiconductor Industry Report 

AMAT shares were trading at $159.91 per share on Tuesday morning, down $2.81 (-1.73%). Year-to-date, AMAT has gained 86.61%, versus a 29.57% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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