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Bull of the Day: Applied Materials, Inc. (AMAT)

Benjamin Rains

Applied Materials (AMAT) posted stronger-than-projected earnings and revenue results on November 14. Shares of AMAT were already up roughly 70% in 2019 prior to its post-earnings surge, as part of a larger semiconductor industry comeback.

The Basics

Applied Materials is a semiconductor equipment firm that has been on a tear in 2019 despite the fact that its sales and earnings fell for four straight periods. The company with a $55 billion market cap is a leader in “materials engineering solutions” that are used to make “virtually every new chip and advanced display in the world.” AMAT’s recently-reported Q4 sales fell 13%, while its adjusted earnings dipped nearly 6%.

The Santa Clara, California-headquartered firm is, of course, not alone in the notoriously cyclical semiconductor and chip industry. Big-names such as Nvidia (NVDA) also posted four straight periods of declining revenues. But this is not totally unusual for chip firms, especially when they come up against hard-to-compare periods of outsized success.

Luckily, Applied Materials and others such as industry giant Intel (INTC) impressed Wall Street with their guidance. And the reason is relatively simple: everyone from Apple (AAPL) to Microsoft (MSFT) rely on semiconductors and they will remain essential backbones of the technological revolution for years to come.

AMAT’s first quarter fiscal 2020 guidance came in well above Wall Street estimates, as signs of a recovery in demand continue. “Applied Materials’ fourth quarter results reflect a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company,” Applied Materials CEO Gary Dickerson said in prepared remarks.  

“The semiconductor industry is increasingly adopting a new playbook for improving chip performance, power, area and cost, and we are investing in unique solutions to enable our customers’ success in the AI-Big Data era.”

 

 

 

 

 

Other Fundamentals

As we alluded to at the outset, the chip equipment maker’s shares have soared roughly 80% in 2019. This crushes the S&P 500’s 23% climb and its industry’s 53%. AMAT stock also popped right after its Q4 report but has pulled back slightly since then.

Applied Materials stock closed regular trading Wednesday at $59.65 per share, down just a few dollars from its new highs. Investors will notice in the chart above that AMAT shares have now climbed ahead of their early 2018 highs.

Along with its industry-topping run of 160% in the last five years, Applied Materials is a dividend payer. The firm currently pays an annualized dividend of $0.84 per share, for a yield of 1.4%. This comes in below the 10-year U.S. Treasury’s 1.74% and semiconductor equipment peer Lam Research’s (LRCX) 1.7%. But AMAT’s yield helps it stand out against the likes of Micron (MU) and Advanced Micro Devices (AMD), who don’t pay a dividend at all.  

The company also repurchased 60 million shares of common stock in fiscal 2019. Meanwhile, AMAT is trading at 18.1X forward 12-month Zacks earnings estimates. This comes in below its industry’s 21.1X average—as it has for much of the past five years—and its own five-year high of 19.2X.

Applied Materials is also part of our Semiconductor Equipment - Wafer Fabrication industry that rests in the top 1% of our more than 250 Zacks industries at the moment.

 

 

 

 

 

Q1 Outlook & Beyond

Our current Zacks Consensus Estimate calls for AMAT’s first quarter fiscal 2020 revenue to jump 9.3% from the year-ago period to reach $4.10 billion, after its Q1 2019 sales fell 10.7%. Overall, the firm’s full-year fiscal 2020 revenues are projected to surge 14% and another 7.3% in 2021 to reach $17.86 billion—which would easily top 2018’s $17.25 billion.

Along with a return to growth on the top line, Applied Materials is expected to post adjusted Q1 earnings of $0.92 per share, for a 13.6% climb from Q1 2019. Peeking ahead, the company’s adjusted FY20 EPS figure is projected to pop over 24%, with 2021 expected to come in another 14.4% higher.

 

 

 

 

Bottom Line

Applied Materials’ consensus earnings estimates have surged since it posted its Q4 results, with its Q1 EPS estimate up 24%—$0.92 vs. $0.72. The chart above helps investors see just how much stronger things look on the earnings front as a whole. This positivity helps AMAT earn a Zacks Rank #1 (Strong Buy) right now, along with an “A” grade for Momentum in our Style Scores system.

AMAT clearly looks to be a stock that investors might want to consider as a 2020 semiconductor industry comeback appears to be on the horizon.

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