Weighing the Fed Against AMAT
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Applied Materials is the ultimate in capital equipment
manufacturers: It produces the fabrication equipment
semiconductor companies use to make their products. With
interest rates coming down, the Fed is trying to goose
companies into more capital spending. Applied's results for the
next few quarters may tell us how they're doing.
By Bill Mann (TMF Otter)
May 15, 2001
What's more important today: This
afternoon's meeting of the Federal Reserve
Board, or Applied Materials' (Nasdaq:
AMAT) earnings report, due out after
today's market close?
You said the Fed meeting, right?
WRONG!!!!
OK, I'm just kidding, you're right. But not by
as much as you think. While the world frets
about whether the Fed will cut interest
rates by 25 or 50 basis points, consider this:
At the market close today Applied Materials,
a capital goods supplier if there ever was
one, will report fiscal second-quarter earnings.
So far the pundits are not hopeful. Applied has warned that its
earnings would be perhaps 40% lower than they were a year before, a
full 50% below last quarter's earnings of $0.66. This is reflective of the
screeching halt Applied Material's customers put on capital spending as
the economy hit the skids.
Interest rate cuts are supposed to encourage both consumers and
businesses to open up the pipeline and spend by making leverage -- in
other words, debt -- cheaper. Great. But consumers are already
leveraged to the hilt, with $5,700 in credit card debt for every man,
woman, and child in the U.S. Businesses, meanwhile, are either in the
same debt boat or still trying to figure out how to gain a return on
their capital expenditures from the late 1990s. Borrow? For what?
Now back to Applied Materials, whose quarter ended April 30. Applied
Materials is the dominant producer of semiconductor fabrication
equipment, tools used by Intel (Nasdaq: INTC), AMD (NYSE: AMD),
Texas Instruments (NYSE: TXN) Taiwan Semiconductor (NYSE:
TSM) and hundreds of other companies in the manufacturing of chips.
(For more on this business, visit our InDepth: Computer
Hardware page.)
Applied Materials goes through violent cyclical rotations every few
years or so, and this year has been no different -- except, perhaps, in
the sharpness of the drop. However, investors should watch this
earnings report (as well as the next two) from Applied to get a sense
of whether some high-tech bellwethers are increasing spending. An
increase in revenues by Applied over this time could be a leading
indicator that some pretty crucial sectors of the economy are on the
mend.
So watch the Fed, but also recognize this: Until it makes sense for
companies to invest money in themselves, they will not. Decreasing
the interest rate to zero won't change that. When it does make sense
to spend companies will do so, and one of the first beneficiaries will be
Applied Materials.
Bill Mann's columns are proudly sponsored by Fred's Croissants &
Filldirt Co. At time of publishing, Bill held beneficial interest in Applied
Materials. His stock holdings can be viewed online, as can the Motley
Fool's disclosure policy. |
