Applied Materials Inc (NASDAQ:AMAT) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Strategy

Peter Lynch’s investment strategy, described in One Up on Wall Street, centers on finding companies with steady growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) method. The approach prioritizes solid fundamentals, earnings strength, and financial stability while steering clear of overvalued or highly indebted firms. Applied Materials Inc (NASDAQ:AMAT) appears to align with this strategy based on key screening factors.

Why AMAT Matches the Peter Lynch Strategy

1. Earnings Growth (EPS 5Y: 23.2%)
   Lynch looked for firms with steady earnings growth between 15% and 30%, as extremely high growth can be hard to maintain. AMAT’s five-year EPS growth of 23.2% fits this range, showing solid yet sustainable progress. The company’s semiconductor equipment business has gained from long-term industry trends, such as the need for advanced chipmaking tools.

2. Fair Valuation (PEG Ratio: 0.74)
   The PEG ratio (Price/Earnings to Growth) adjusts the P/E ratio for growth, with a figure below 1 indicating the stock might be undervalued compared to its earnings potential. AMAT’s PEG of 0.74 suggests its growth outlook isn’t fully priced in—a key trait of Lynch’s preferred stocks.

3. High Profitability (ROE: 35.6%)
   Return on Equity (ROE) shows how well a company turns shareholder equity into profits. AMAT’s 35.6% ROE surpasses Lynch’s 15% benchmark and ranks among the best in its sector, reflecting efficient capital use and strong operations.

4. Moderate Debt (Debt/Equity: 0.33)
   Lynch favored firms with low debt, ideally a Debt/Equity ratio under 0.25. While AMAT’s 0.33 is slightly higher, it stays below the screener’s 0.6 cap and points to a stable financial setup. The company’s solid free cash flow relative to debt (Debt/FCF: 1.07) also lowers risk.

5. Liquidity and Stability (Current Ratio: 2.46)
   A Current Ratio above 1 means a company can cover short-term bills. AMAT’s 2.46 shows good liquidity, though it’s a bit below some peers—a gap balanced by its strong earnings and financial health.

Additional Strengths Beyond the Screen

Our fundamental analysis report gives AMAT a score of 7/10, noting:

• Exceptional profitability: Leading margins (Operating Margin: 29.7%) and ROIC (27.9%) put AMAT at the top of its field.
• Sound financials: A high Altman-Z score (9.61) and controlled debt levels cut bankruptcy concerns.
• Fair pricing: While the P/E (17.09) seems high alone, it’s reasonable compared to peers and backed by growth.
• Dividend growth: A small but rising dividend (5-year CAGR: 12%) with a safe payout ratio (~19%).

Sector Trends and Challenges

AMAT works in the semiconductor equipment industry, a key part of global tech infrastructure. Long-term demand comes from AI, IoT, and advanced manufacturing. Still, shifts in semiconductor spending and supply-chain risks need watching.

Finding More Peter Lynch Picks

For those searching for similar stocks, our Peter Lynch Stock Screener offers a filtered list of firms meeting these standards.

Disclaimer: This analysis is not investment advice. Do your own research or consult a financial advisor before investing.