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Politics : Formerly About Applied Materials

AMAT 268.87

+4.6%

Jan 2 9:30 AM EST

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To: Don Additon who wrote (1781)	8/29/1996 11:25:00 AM
From: Don Additon	of 70976

THIS IS THE COMPLETE VERSION OF MY PREVIOUS LETTER It is very easy to get blindsided by focusing too much on P/E ratios. The earnings are typically trailing twelve months results while the price is more-or-less current. The bottom line is this is a "stale" indicator and for the volatile SEM industry is worth very little. As an example, the mean of First Call earnings estimates for AMAT in FY 1997 (i.e., Oct. 1997) has dropped precipitously in just the past few months. * In late March the consensus was for a $4.61 EPS. * In late April the consensus was for a $4.43 EPS * In late May the consensus was for a $3.97 EPS * In late June the consensus was for a $3.81 EPS * In late July the consensus was for a $2.74 EPS * In late August the consensus was for a $1.82 EPS I see an extremely scary pattern here! In March, 1997 earnings were expected to be well above 1996 earnings - now the opposite is true. Yet the P/E ratio does NOT reflect this trend whatsoever! It continues to show an attractive single digit P/E - attractive to suckers! For the record, I think AMAT is a great long-term stock; however, I try to pick stocks with my head and not my heart. If AMAT and other co's tell me the near term looks horrible because Fab's are being pushed out; that quarterly earnings will be down not just sequentially, but year-to-year; and that they must layoff workers, I tend to listen! Since no one (I know) is willing to say when this industry will get back on track, I see no reason to buy these stocks at this juncture. I DO know that the third quarter earnings season is going to be far worse for the SEM's than was the second quarter. I would be very surprised if the July lows in these stocks are not cracked following the inevitable rash of early earnings warnings. I suggest reading the following before purchasing SEM stocks: * An Interview With Fred Hickey" in last week's Barrons * Any of the recent articles by Carl Johnson techweb.cmp.com on the terrible state of the semi equipment companies * Sample recent 10-Q reports from several SEM companies sec.gov Finally, many of these stocks will be purged from portfolios by year-end to generate tax losses to offset other recognized gains and/or to clean-up protfolios of embarrassed institutions. Remember July and happy investing! p.s. my target low for AMAT is below $16

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