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Applied Materials (AMAT) Up 8.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Applied Materials (AMAT). Shares have added about 8.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Applied Materials due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Applied Materials Beats on Q3 Earnings and Revenues

Applied Materials delivered fiscal third-quarter 2019 non-GAAP earnings of 74 cents per share, which beat the Zacks Consensus Estimate by 4 cents and improved 5.7% sequentially. However, the figure declined 28.8% year over year.

Net sales of $3.562 billion surpassed the Zacks Consensus Estimate of $3.526 billion and were within management’s guided range of $3.375-$3.675 billion. The figure improved marginally 0.6% from the previous quarter but decreased 14.4% from the year-ago quarter.

Year-over-year decline was owing to market uncertainties which in turn led to weak segmental performance. Moreover, softness in semiconductor and display markets on account of slowdown in memory and display customers’ spending was a major headwind.

Nevertheless, the company witnessed solid momentum across United States and Taiwan.

Management remains optimistic about the price elasticity of NAND, which is expected to bolster the NAND customer spending in the near term. Further, demand for foundry logic is improving thanks to rising need for specialty nodes in automotive, power, IoT, communications and image sensor markets.

However, management continues to expect overall wafer fab equipment spending in 2019 to be down in the range of mid to high-teens.

Further, the company’s expanding etch footprint bodes well for its semiconductor portfolio. Moreover, its strengthening momentum in conductor etch is aiding it in gaining traction in DRAM and NAND. Additionally, the company remains confident on its focus on research and development activities to develop new products

Segments in Detail

The Semiconductor Systems Group (SSG) generated $2.27 billion sales in the reported quarter (64% to its net sales), reflecting a decrease 11.8% year over year.

Applied Global Services (AGS) reported sales of $931 million (26% of net sales), which decreased 2.2% from the prior-year quarter.

Sales from the Display segment came in $339 million (10% of net sales), down significantly 45% from the year-ago level.

Revenues by Geography

United States, Europe, Japan, Korea, Taiwan, Southeast Asia and China generated sales of $552 million, $162 million, $556 million, $445 million, $596 million, $134 million and $1.12 billion, contributing 15%, 5%, 16%, 12%, 17%, 4% and 31% of the net sales, respectively.

We note that sales in United States and Taiwan were up 58.6% and 17.8% year over year, respectively. However, Applied Materials witnessed a decline of 27.7%, 20.6%, 22.2%, 18.8% and 32.2% in sales in Europe, Japan, Korea, Southeast Asia and China, respectively.

Operating Results

Non-GAAP gross margin was 44%, contracting 190 bps from the year-ago quarter.

Applied Materials’ adjusted operating expenses as a percentage of net sales expanded 250 bps on a year-over-year basis to 20.9%.

Further, non-GAAP operating margin of 23% in the reported quarter contracted significantly by 440 bps from the prior-year quarter.

Balance Sheet & Cash Flow

As of Jul 28, 2019, cash and cash equivalent balance was $3.01 billion compared with $3.12 billion as of Apr 28, 2019. Inventories were $3.54 billion compared with $3.68 billion in the prior quarter. Accounts receivables improved to $2.37 billion from $2.26 billion in the fiscal second quarter.

The company returned $528 million and $196 million through stock repurchases and cash dividends, respectively.

Notably, Applied Materials generated $787 million, down from $800 million in the previous quarter.

Guidance

For fourth-quarter fiscal 2019, Applied Materials expects net sales between $3.535 billion and $3.835 billion. Non-GAAP EPS is expected in the range of 72-80 cents.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Applied Materials has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Applied Materials has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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