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Will Display Strength Aid Applied Materials' (AMAT) Q1 Earnings?

Zacks Equity Research

Applied Materials, Inc. AMAT is set to report fiscal first-quarter 2018 results on Feb 14. Last quarter, it delivered a positive earnings surprise of 2.2%.

The company’s surprise history has been pretty impressive. It beat estimates in each of the trailing four quarters, with an average positive earnings surprise of 2.82%.

Notably, on a 12-month basis, Applied Materials’ shares have returned 35.6%, underperforming the industry’s gain of 39%.

Let’s see how things are shaping up for this announcement.

Strong Demand for Applied’s Services

The company has well-differentiated products and high market share, and is efficiently delivering key enabling technology to logic and foundry customers. Service is an important part of Applied's portfolio that grew significantly in the last quarter.

The Applied Global Services (AGS) segment increased 5.7% sequentially and 19.9% year over year. The segment is expected to perform well in the upcoming quarter, driven by improved device and yield performance. The Zacks Consensus estimate for the first quarter for AGS is pegged at $791 million.

Strength in Display to Drive Revenues

The company has gained considerable success in expanding beyond semiconductors, particularly in display. New display technologies such as OLED are opening new market opportunities for Applied Materials.

The available market opportunity is now more than 10 times that of the traditional LCD. Last quarter, the Display segment was up 65.1% sequentially and 49.8% from the year-ago level.

The segment is expected to be driven by significant opportunities coming from investments in areas such as artificial intelligence, big data, cloud infrastructure, Internet of Things (IoT), virtual reality and smart vehicles. The Zacks Consensus estimate for the upcoming quarter for Display segment is pegged at $447 million.

However, increasing competition, high fixed-cost structure and customer concentration remain major concerns that could affect the results in the upcoming quarter.

What Our Model Suggests

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if these have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Applied Materials has a Zacks Rank #2 and an Earnings ESP of 0.57%, a combination that suggests that the company is likely to beat estimates.

Other Stocks to Consider

We see a likely earnings beat for each of the following companies.

Century Communities, Inc. CCS, with an Earnings ESP of +7.32% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA Corp. NVDA, with an Earnings ESP of +6.84% and a Zacks Rank #2.

Advanced Micro Devices, Inc. AMD, with an Earnings ESP of +8.72% and a Zacks Rank #3.

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