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Applied Materials (AMAT) Down 1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Applied Materials (AMAT). Shares have lost about 1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Applied Materials due for a breakout? 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 catalysts.

Applied Materials Beats on Q2 Earnings and Revenues

Applied Materials Inc. reported robust fiscal second-quarter 2019 results, with both the top and bottom lines surpassing the Zacks Consensus Estimate.

The company’s pro-forma earnings per share (EPS) of 70 cents beat the consensus mark by 4 cents and came in within the guided range of 62-70 cents. However, the bottom line was down 42.6% year over year and 13.6% sequentially.

Revenues of $3.54 billion surpassed the Zacks Consensus Estimate of $3.48 billion and were within the guided range of $3.33-$3.63 billion.

However, the top line decreased 5.7% sequentially and 22.7% year over year.

Management expects inventory levels to normalize in the near term, creating a favorable environment for capacity investments in 2020. In foundry logic, management expects spending to be up year over year.

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

Also, management expects 2019 display revenues to decline from a year ago as customers push out investments. However, the company is positive about the display market over the long term as it is becoming more technology intensive and increasingly dependent on materials innovation. Moreover, Mobile OLEDs and large screen televisions are opening new market opportunities for Applied Materials.

The company sees significant opportunities from emerging trends on the semiconductor and display fronts such as artificial intelligence, big data, cloud infrastructure, Internet of Things (IoT), virtual reality and smart vehicles.

We believe that Applied Materials is in a great position to grow sustainably and profitably, based on its strong pipeline of enabling technologies, supported by expanding opportunities on the semiconductor, service and display fronts.

Let’s delve deeper into the numbers.

Revenues by Segment

The Semiconductor Systems Group (SSG) contributed 62% to its total revenues, reflecting a decrease of 3.7% sequentially and 24.7% year over year.

Applied Global Services (AGS) was the second-largest contributor with 28% revenue share. The segment’s revenues increased 2.3% sequentially and 4.1% from the prior-year quarter.

Revenues from the Display segment, accounting for 10% of the total revenues, were down 31.4% sequentially and 51.6% from the year-ago level.

Revenues by Geography

China contributed 28%, Taiwan 22%, Japan 15%,United States 13%, Korea 12%, Europe 6% and Southeast Asia 3% to the total revenues.

United States and Taiwan increased both on a sequential and year-over-year basis. All other countries, except China and Japan, decreased on a sequential and year-over-year basis. China increased on a sequential basis and Japan was up 3.6% from the year-ago quarter.

Operating Results

Pro-forma gross margin was 43.5%, down 240 basis points (bps) from the year-ago quarter.

Applied Materials’ operating expenses of $754 million decreased 1.3% from the year-ago quarter.

Pro-forma operating margin of 22.4% decreased 690 bps year over year.

Balance Sheet

At the end of the fiscal second quarter, inventories were $3.68 billion versus $3.72 billion in the prior quarter. Accounts receivables decreased to $2.26 billion from $2.44 billion in the fiscal first quarter. Cash and cash equivalent balance was $3.11 billion compared with $3.19 billion in the fiscal first quarter.

The company returned $625 million and $189 million through stock repurchases and cash dividends, respectively.

Guidance

Applied Materials provided guidance for the third quarter of fiscal 2019. Revenues are expected to be $3.525 billion (+/-$150 million). 

Non-GAAP EPS is expected in the range of 67-75 cents. 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Applied Materials has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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