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Why Is Applied Materials (AMAT) Down 0.8% Since Last Earnings Report?

Zacks Equity Research
Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

It has been about a month since the last earnings report for Applied Materials (AMAT). Shares have lost about 0.8% 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 Q1 Earnings and Revenues

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

The company’s pro-forma earnings per share of 81 cents beat the consensus mark by a couple of cents and came in within the guided range of 75-83 cents. However, earnings were down 23.6% year over year and 16.5% sequentially.

Revenues of $3.75 billion surpassed the Zacks Consensus Estimate by 0.95% and were within the guided range of $3.56-$3.86 billion.

However, revenues decreased 6.5% sequentially and 10.7% year over year.

Despite strong fiscal first-quarter results, its share price declined 1.99% due to weaker-than-expected revenue guidance provided by management. Also, shares have lost 25.9% in the past year compared with its industry’s decline of 8.7%.

Management expects the industry spending on manufacturing equipment to be lower in 2019 compared with 2018, citing a pullback on memory chips’ spending and macroeconomic conditions. A slowing smartphone market, especially in China, and its impact on chip demand remains a concern.

Notably, the company has attained considerable success in expanding beyond semiconductors, particularly in display. 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 as well as 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 60.4% to its total revenues, reflecting a decrease of 1.8% sequentially and 20.5% year over year.

Applied Global Services (AGS) was the second-largest contributor with 25.6% revenue share. The segment’s revenues decreased 1.5% sequentially but increased 9.2% from the prior-year quarter.

The Display segment, which contributed14% to the total revenues,was down 27.8% sequentially but up 14.4% from the year-ago level.

Revenues by Geography

China contributed 26%, Japan and Taiwan 17% each, Korea 15%, United States 12%, Europe 8% and Southeast Asia 4% to the total revenues.

Japan and China declined on a sequential basis, while Korea and Taiwan deteriorated from the year-ago quarter. Southeast Asia declined both on a sequential as well as year-over-year basis.

Operating Results

Pro-forma gross margin was 44.6%, down 260 basis points (bps) from the year-ago quarter.

Applied Materials’ operating expenses of $757 million increased 4.4% from the year-ago quarter.

Operating margin of 24.6% decreased 550 bps year over year.

Balance Sheet

At the end of fiscal first quarter, inventories decreased to $3.7 billion from $3.72 billion in the last reported quarter. Accounts receivables decreased to $2.44 billion from $2.57 billion in fiscal fourth-quarter 2018. Cash and cash equivalent balance was $3.19 billion compared with $4.03 billion in the last reported quarter.

The company returned $750 million and $192 million through stock repurchases and cash dividends, respectively.

Guidance

Applied Materials provided guidance for the second quarter of fiscal 2019. Revenues are expected between $3.33 billion and $3.63 billion. 

Non-GAAP EPS is expected in the range of 62-70 cents. 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -15.52% due to these changes.

VGM Scores

Currently, Applied Materials has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Applied Materials has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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