AMAT Restructures EES Business - Analyst Blog

Applied Materials (AMAT) recently announced that it plans to restructure its energy and environmental solutions (EES) business, which primarily consists of the solar product line, with a view to taking the unit to profitability by 2011. The world’s biggest maker of chip equipment said that the restructuring would cost up to $425 million (charge to be taken in the third quarter) and eliminate 400 to 500 jobs.

The company also said that it would discontinue its SunFab product line, which makes thin film solar panels, as part of the reorganization effort. Applied Materials said it would instead focus resources on the crystalline silicon solar and advanced energy business.

Though thin film solar panels have a higher conversion rate, meaning that they generate more solar power than photovoltaic panels, the cost of manufacturing them is also higher. Consequently, only very large operations, such as utilities and solar farms would be in a position to deploy them. At the same time, the competing crystalline silicon technology, while being less efficient, has much lower manufacturing costs. Therefore, it is able to take business away from thin film producers.

These actions are expected to trim operating costs by $100 million annually and lower third quarter earnings by an estimated 14 cents per share.

However, the advantages of thin film silicon cannot be discounted. Once solar power generation gains momentum, there will be an automatic demand for increased efficiencies, which will increase the demand for the technology, improve funding for projects and also pressure governments worldwide to frame more conducive renewable energy policies.

While Applied Materials intends to cater to the continued demand in Europe and China through its cheaper crystalline silicon equipment, the company will continue to make investments for the development of thin film equipment.

Solar aside, the rest of the business continues to see solid growth. Particularly, the success of tablet computers, including Apple Inc’s (AAPL) recently launched iPad that use advanced displays and a comparatively higher number of memory chips, is expected to boost Applied Materials’ sales. The company estimates sales of 15 million tablet devices in 2011, which is expected to help the silicon systems group revenue to grow 140%, up from its prior forecast of 120%.

Applied Materials enjoys a very strong position in the semiconductor equipment market, which is expected to grow by triple-digits this year. Being a market leader, the company will gain from the ongoing strength in the market. The EES segment is the only one generating losses for the company, so we are very encouraged by Applied’s decision to restructure this business.

As such, we continue to encourage investors to accumulate shares of Applied Materials, as reflected in the short-term Zacks #2 Rank (Buy) recommendation.
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