Technology

Applied Materials to See Earnings Boost From Kokusai Electric Acquisition

Jon C. Ogg

Published: July 1, 2019 12:35 pm

Last Updated: January 30, 2020 7:02 pm

Applied Materials Inc. (NASDAQ: AMAT) is making an acquisition that might not be getting the attention it deserves. The top chip equipment and capital spending leader has announced a definitive agreement to acquire a 100% ownership Kokusai Electric. The all-cash deal is valued at $2.2 billion, and the private equity and global investment firm KKR is the seller.

While a $2.2 billion deal may not be a total game-changer for a company with a $42 billion market cap, Kokusai is one of the top players in providing high-productivity batch processing systems and services for chip-makers and related fields and will bolster Applied’s offerings in single-wafer processing systems. Kokusai will continue to be based in Tokyo, and its technology and manufacturing centers will remain in Toyama, Japan, and Cheonan, Korea.

The acquisition is easily funded by Applied’s cash and investment balances, and it has ample credit and manageable long-term debt for a company with its leadership position. What may further stand out here is that Applied noted in its press release that the acquisition is expected to be immediately accretive to its operating earnings at the close.

Looking over commentary and analysis about the merger seems to reveal that Applied is getting the company for less than eight times EBITDA (earnings before interest, taxes, depreciation and amortization). Another aspect of the deal is that this expands Applied’s footprint in Asia, but without having to go into the unknown China risks if the recent trade ceasefire reverts back to hostilities.

It is too soon to know whether there will be regulatory issues. The press release indicated that it could take 12 months to close, and this should be less of a review than the prior failed acquisition when Applied tried to buy Tokyo Electron, a deal valued at more than $9 billion before it was canceled due to regulatory issues from the U.S. Department of Justice. This newer transaction is not even one-fourth the size of that prior deal.

Applied Materials stock was still up over 2% at $45.82 on last look, while its 52-week range is $28.79 to $50.39 and the consensus target price of $51.24 is not even the highest the shares have been over the past two years.

Investors should expect to see more analyst calls on Tuesday after the dust settles. That said, it’s hard to expect many formal analyst upgrades with a bias already pointing toward “Buy” ratings, even if it may generate some increased earnings estimates and price target hikes.

The consensus analyst earnings estimate is $2.97 per share in 2019 followed by $3.64 for 2020. Those are both under the $4.45 per share for 2018, but being immediately accretive, even if just on a non-GAAP basis, will help to increase earnings expectations beyond 2020.