Wednesday, August 16, 2006

Color on quarter: Applied Materials (AMAT)

- Several firms are commenting on Applied Materials (NASDAQ:AMAT) after the co reported its July qtr results and announced guidance for October qtr:

*RBC notes July bookings were up 7% (mid-point of guidance). July revenues were strong at $2.54B and GAAP EPS were $0.33, better than their model of $0.31. Pro-forma EPS of $0.35 excluded stock-comp expense, an acquisition charge, and a tax refund.

Order guidance for October better than expected: Management guided for orders to be flat +/-2%. Firm had been modeling a decline of 7-8%. Flat panel orders look to be better than our model and while checks indicate semi orders tracking down 10%, or so, guidance suggests closer to 5%. Management acknowledged a slowdown and commented that memory orders will remain strong for the foreseeable future, consistent with firm's view.

Nancy Handel announced her retirement and plans to leave Applied Materials effective on January 5th, after 21 years with the company. While, it is never good news to see a CFO leave, the firm is not concerned about the financials.

Stock opinion: It was healthy to hear management acknowledge the challenging order environment. However, it would have been better for management to guide orders down and get more of the bad news out of the way. Firm hopes that management is not working too hard for the October order book at the expense of January: a concern that could weigh on the stock over the next few months. They continue to recommend that investors buy the stock on weakness for a rally later in the year/early next year.

*Goldman Sachs notes that while management did acknowledge a softening in business conditions at customers, they did not get the level of capitulation they were hoping for from the call as flattish order guidance does not fully reflect the weakening in fundamentals they expect beginning in CY3Q2006.

As a result the firm is maintaining their Neutral rating on the stock and would wait to be more aggressive until: 1) they see a more pronounced management capitulation on the cycle, driven by weakening fundamentals, 2) order declines over the coming quarters drive incremental Street estimate cuts, as they continue to view current Street estimates as too optimistic, (3) Applied's margins approach trough levels, which is one of the criteria of our framework for investing in cyclical stocks. Further, the firm would look for evidence of pricing discipline as opposed to price cuts as incentives to drive orders, thus allowing for margin expansion in future periods.

No change to 12-month tgt of $15.

*Deutsche Bank notes Applied Material's F3Q06 (Jul) results beat expectations, but F4Q06 guidance and a more cautious tone suggests a cyclical peak. Firm believes that a combination of FPD, and logic and foundry weakness could precipitate a business decline beginning in C4Q06. Reiterates expectation of a digestion period beginning toward year-end, extending into 2007, and believes Applied's results and commentary reinforce this view. Maintains Hold rating.

Firm values AMAT in the middle of the 15x to 22x range of C2007 EPS estimates they use to value SCE stocks. $19 price target equates to ~16.5x C2007 EPS of $1.15 (excluding $0.12 in stock compensation expense).

Notablecalls: AMAT looks like dead money to me. Its not even a trading stock as there is zero volatility.

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