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Applied Earnings Preview: Will It Miss?

Zacks Equity Research

Applied Materials, Inc. (AMAT) is set to report second quarter 2013 results on May 16. Last quarter, it posted a 100% positive surprise. Let’s see how things are shaping up for this announcement.

Growth Factors This Past Quarter

Though Applied’s first-quarter revenues were down sequentially, the results were at the high end of the management guidance, owing to better-than-expected performance at the SSG segment. Strength at foundries drove the outperformance in the last quarter. We believe that Intel’s (INTC) Ultrabook partners and Microsoft’s (MSFT) Windows 8 adopters may also boost demand through 2013.

Despite lower volumes in the last quarter, margins were up sequentially due to a favorable mix.

Though there is potential in the solar energy market, the company's solar division has taken longer than expected to reach profitability. The company posted weak results in the last quarter due to overcapacity and weaker-than-expected demand.

Earnings Whispers?

Our proven model does not conclusively show that Applied will beat earnings estimates this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method)and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here as you will see below.

Zacks ESP:  The Most Accurate estimate stands at $0.11 while the Zacks Consensus Estimate is higher at $0.13. That is a difference of -15.39%.

Zacks Rank #3 (Hold): Applied’s Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

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