Applied Materials' Quarter Impresses Analysts
Updated from Feb. 19
Analysts were busily taking their financialforecasts upwards after
AppliedMaterials
(AMAT) - Get Report
swung to a profit andsoundly beat Wall Street expectations for the quarterending in January. As an added bonus, its sales andearnings guidance for the April quarter bested analystestimates by a long shot.
In retrospect, chief executive officer MikeSplinter's enthusiasm over
taking up the leadership post atthe company last April was spot on. Though the market lookeddownright brutal at the time, demand was in factpoised to accelerate, starting last fall. Now Appliedis reaping the benefits of surging demand for itsequipment as well as its own market share gains.
Still, the stock was recently off 29 cents, or 1.3%, to $21.84 early Friday.
Applied's performance is "markedly better than its peers, aresult, in our opinion, of market share gains andstrong penetration in Taiwan and China," observed Needham analyst Cristina Osmena. "The strengthof the recent quarterly report highlights the company's market share gains and favorable customerexposure and has caused us to revisit our assumptions on peak earnings potential -- a rarity this earningsseason."
Osmena's new 2004 EPS estimate roughly doubled from 41cents a share to 79 cents, with revenue risingdramatically from $6.03 billion to $7.9 billion. Infiscal year 2005, she estimates Applied can churn outpeak earnings of $1.08 per share on $10.2 billion in revenue.
"We are now assuming that the company can generatepeak revenues comparable to its prior peak due to market share gains, the growth in demand for flatpanel display equipment, and the addition of moreservices to the portfolio of services available inprior cycles," she wrote.
Osmena has a hold rating on the shares, but saysApplied is one of the better bets on a trading basisover the next few months, as she expects equipmentstocks to consolidate. Investors should either stay onthe sidelines until the second-half demand environmentclears up, or "rotate into quality namessuch as AMAT, which are more likely to keep theirvalue during a downdraft in the group," she said. Her firmhasn't done any recent banking for Applied.
At Piper Jaffray, analyst Stephen O'Rourke hoistedhis fiscal year 2004 revenue number by a full $1.5billion, to $7.69 billion from $6.15 billion, whileraising his EPS estimate to 77 cents from 56 cents. Hethinks the stock has room for further upside in light of theimproving outlook for EPS and the potential forfurther margin expansion in the quarter underway.
"We believe orders are largely in house to supportfiscal second-quarter forecasted growth, and that theorder continues to firm for the third fiscal quarter
ending in July," O'Rourke commented, adding that Appliedis on track to keep expanding margins. He has anoutperform rating on the shares; his firm hasn't donerecent investment banking for AMAT.
A Stellar Quarter
Net sales at the leading global chip-equipment maker reached $1.56 billion, up 48% from last year's levels and well above expectations for $1.32 billion.
Gross margin stood at 43.5%, up from 40.5% in the prior quarter and 37% last year.
Net income totaled $82 million, or 5 cents a share, up from a net loss of $66 million, or 4 cents per share, for the same period last year.
On a pro forma basis, earnings amounted to 12 cents a share, compared with analyst expectations for 8 cents a share. The pro forma number excludes a pretax charge of $167 million, or 7 cents a share, for consolidating facilities.
Applied Materials guided for sequential sales to rise 20%, implying April quarter revenue of about $1.87 billion. EPS should fall between 17 cents and 19 cents per share, the company said.
Both far surpass analyst consensus estimates from Thomson First Call, which had modeled for revenue of $1.50 billion and earnings of 11 cents a share.
The company said Wednesday that new orders in the first quarter reached $1.68 billion, up 32% from the prior quarter.
"We are pleased with our revenue- and order-growth trends," said Chief Executive Officer Mike Splinter. "Semiconductor unit demand remained robust throughout the quarter, driven by higher consumer electronics and business IT spending. Based on these industry drivers, our customers have announced increased capital spending plans for 2004."
Demand from dynamic random access memory (DRAM) manufacturers accounted for 26% of sales in the January quarter, while another 35% came from chip foundries. The company said both customers will remain key contributors to sales growth in the quarter now under way.
Also on the postclose conference call, Applied management said that for now it's holding off raising prices despite rising demand, in a bid to gain further market share.
In response to an analyst question, the company noted that many industry pundits now expect chip-equipment industry sales growth on the order of 40% this year -- well above the 20% growth outlook expected back in November 2003.