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Bull of the Day: Applied Material (AMAT)

Neena Mishra

Semiconductor stocks have been one of the best performing groups this year. The PHLX SOX Semiconductor Sector Index is up about 35% this year, beating the broader technology sector’s return of 24.5% and S&P 500’s return of 13.9%.

About the Company

Headquartered in Santa Clara, CA, Applied Materials (AMAT) is a leading equipment supplier to the global semiconductor industry. They have been the industry leader for over twenty years.

Their equipment is mainly used in the manufacturing of semiconductors, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules.

Impressive Results and Raised Guidance

The company reported excellent results for Q3 FY 2017, beating our estimates on both the top and bottom lines. The pro forma earnings of 86 cents per share beat the Zacks Consensus Estimate by 3 cents and were also toward the higher end of the guided range. It was the company’s best quarter in its 50-year history.

 “With revenue and profits at all-time highs, Applied has tremendous momentum and a very positive outlook for the future,” said the CEO. “Our markets are growing with a broader set of demand drivers, and the breadth of Applied’s technology enables us to play a larger and more valuable role advancing the innovation roadmap in semiconductor and display.”

The management also provided its guidance for the fourth quarter, which was better than consensus.

Surging Estimates

After strong results, analysts have been raising their estimates for the company. Zacks Consensus Estimates for the current and next year have surged to $3.23 per share and $3.68 per share, from $3.10 and $3.28 respectively, before the results.

Rising estimates sent the stock to a Zacks Rank # 1 (Strong Buy). The company has an excellent record of beating estimates. They have missed only once in the past five years.

Applied Materials, Inc. Price, Consensus and EPS Surprise

Applied Materials, Inc. Price, Consensus and EPS Surprise | Applied Materials, Inc. Quote

Multiple Growth Drivers

In the past few years, the company has successfully diversified its business which is no longer PC demand driven. Additional demand drivers have emerged in the areas of big data, Internet of Things (IoT), cloud infrastructure, artificial intelligence, virtual reality and self-driving cars.

One new and fast growing area of the business is equipment used to produce organic light-emitting diode, or OLED, displays.

“Chip manufacturing gear is a cyclical business, but the industry is benefiting from an especially sustained uptick in demand for memory and processors that is driven by significant technology shifts under way in markets such as data centers and automobiles,” per WSJ.

The Bottom-Line

Shares of this company are up more than 68% this year but despite this surge, they are still trading at a rather attractive valuation of 16.5 times forward earnings.

Zacks Industry Rank for “Semiconductor Equipment - Wafer Fabrication” is currently 5 out of 265 (top 2%), suggesting that outperformance could continue in the coming months. The stock has Zacks Style Score of “A” for Growth and “B” VGM.

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