Thursday, November 16, 2006

Color on quarter: Applied Materials (NASDAQ:AMAT)

Several firms are commenting on Applied Materials (NASDAQ:AMAT) after the co issued in-line results but weakish guidance last night:

- UBS notes that AMAT's Jan-07 order guidance was in line with its industry peers as DRAM customer orders likely offset weak foundry orders again. AMAT now expects 2007 industry spending on wafer fab equipment to increase by 6% with momentum improving in 2H07

AMAT guided its Jan-07 sales to $2.3-$2.4B (-5% to -10% q/q), and EPS to $0.26-$0.27 which compares to the pre-call consensus estimate of $2.5B and $0.29. The firm has lowered their FY07 estimate from $1.07 to $1.03 as AMAT's tax rate increases from 32% to 34.5%.

Firm's 12-month price target of $19 is based on applying an 18x multiple to CY08 EPS estimate of $1.03. They continue to remain on the sidelines as they look for increased equipment orders from foundry customers, which they estimate AMAT is most leveraged to, before warming up to the stock. Maintains Neutral.

- Bear Stearns notes that mgmt guided orders to decline 5-10%, inline with firm's preview and understanding of consensus. However, top line calls for down 5-10% as well; this is slightly worse than their expectation into the call for down 5% guidance and also below consensus view.

The fim is adjusting their estimates down for fiscal 2007, but cuts are focused on the near term as their previous model was too optimistic on a return in foundry and flat panel activity. However, at this point, they do not currently believe Applied's overall order book will deteriorate substantially over what they expect will roughly represent a 2 quarter order pause. Despite weaker near-term expectations, the firm is modeling for mid to high-single digit top line growth after the Apr-Q. This is based on the assumption that while memory spending may curtail some, other semi end markets and served segments should begin to kick in.

Maintains Outperform but cut tgt to $22 from $25.

- Banc of America notes that AMAT's 2007 outlook is for semi-equipment industry to be up 6% largely driven by memory spending. DRAM cap-ex overtakes NAND in the memory mix. AMAT expects to outperform due to share gains in semi-equipment and high growth of the adjacent technologies. Flat panel is expected decline in 2007 due to the oversupply.

The firm is more cautious on their 2007 outlook: semi cap-ex down 10%. They think the risk of a sharp correction in memory is high. Firm points out that a year ago the industry was very bullish on flat panel and NAND only to see sharper than expected corrections in both markets. The current pause in semi-equipment suggests customers, at a minimum, want to see seasonal sell-through data.

The risk is that a more serious oversupply problem emerges in memory. The market acceptance of Vista and a continued oversupply in the NAND are the big swing factors. Either of these scenarios would likely lead to much weaker results at AMAT. Maintains Neutral and $18 tgt.

Notablecalls: Any of this stuff actionable? Not really. Good to know category.

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