Cramer: Tech Titan Should Break-Up
Cramer thinks the best way to unlock shareholder value is for this technology company to break apart.
"I'm talking about Applied Materials," said Cramer on Monday's broadcast.
If you're familiar with the company, you're probably familiar with its semiconductor business. However, Cramer also said the company has other segments that you might not know about.
There's a display segment in which Applied Materials makes the equipment that's used to manufacture liquid crystal displays, or LCDs, and organic light-emitting diodes, or OLEDs, for TV screens, personal computers, tablets and smartphones. "This business has been in solid shape thanks to the strength in mobile devices," Cramer said.
And it also has an Energy and Environmental Solutions division, a segment that Cramer doesn't like as much. "They make solar panels," Cramer said. "And even though the solar power market is rebounding, there's still a ton of excess capacity when it comes to the hardware needed to manufacture the stuff."
It's the solar business that Cramer says has generated a drag on shares. "Even though it is a miniscule part of the business compared to the semiconductor side, Applied Materials gets punished for solar," he said.
For that reason, the Mad Money host advocates a break-up.
"Ideally, I think Applied Materials should spin-off the solar business together with the display business as a separate, more speculative company," Cramer said.
"The remaining semiconductor equipment business would instantly be rewarded with a higher valuation as a pure play without the taint of solar."
That's because Cramer believes a resurgence in global demand will drive chip sales in the months and even years ahead. "In the latest quarter, Applied Materials saw an 84% increase in orders for its semiconductor division," he said. "I believe Applied Materials has a robust semiconductor equipment business at just the moment when demand for this hardware is coming back with a vengeance."
Cramer's crunched the numbers – here's what he's found.
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"If you assume that the core semiconductor equipment business can get the same valuation as rival KLA-Tencor, which trades at 3 times sales, and I think that's a safe assumption, then you get a $22.2 billion market cap for the core business alone—that's 25% higher than where the stock is right now," he said.
Looking at solar and display, "Even if you're incredibly conservative and say it only deserves to trade at one times sales, you still get a business worth $800 million. The sum of the parts gets you $23 billion, or a $19 and change," Cramer said.
If you're intrigued by Cramer's thesis, there may be another reason to hit the buy button.
"Goldman Sachs thinks the company as it stands now can earn $2 a share at the peak of the new semiconductor equipment cycle. At the last peak, the stock traded at 11 times forward earnings, so that means Applied Materials could go to $22 over the next two years or so. That gives you a whopping 53% gain from here, but you'll have to be patient," he said.
In other words, according to Cramer, Applied Materials could give you two ways to win.
"If management spins-off the solar and display businesses as a separate companies the stock could move sharply higher overnight," he said. "And, with the semiconductor equipment business coming back, even if the company remains whole, the stock can go higher simply by virtue of stronger earnings over time."
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