AMAT ( sold , bounced $48 - $54) Materials' Mixed Message
By Monica Rivituso
APPLIED MATERIALS (NASDAQ:AMAT - news), the alpha pooch of the chip-equipment industry, threw investors a bone late Tuesday in its second-quarter report. Thing is, that bone came on a plate accompanied by some other vittles — most of which looked more like a, well, dog's breakfast.
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The mixed menu probably shouldn't be much of a surprise. After all, these are hardly the days of black-and-white quarterly reports. While the chip-equipment king might have missed expectations — and told analysts not to expect too much next quarter — it did provide a glimmer of hope. And in today's murky tech environment, such encouragement goes a long way. Maybe that's why Applied outpaced even the strongly rallying market on Wednesday, ending 8.4% higher at $54.10. That puts Applied up 41.6% year to date (but still 48% off its 52-week high of $104.75).
So, what did Applied serve up for the quarter? It missed consensus profit estimates by a penny, earning 32 cents a share (excluding one-time items), on net sales of $1.91 billion. Those earnings and sales numbers were 52% and 30% lower, respectively, than a year ago. And new orders — a metric closely followed to gauge the strength of future business — fell 44% sequentially to $1.35 billion.
Business probably won't get any better next quarter, either. Management told investors to expect the company to break even or come in slightly better than break-even — a far cry from First Call's 22-cent consensus estimate. Meanwhile, revenue should fall to between $1.2 billion and $1.3 billion. But even with all that bad news, analysts for the most part were encouraged by Applied's results.
That's because although the company described the current downturn as the most severe one in recent history, and admitted the tough times weren't over, it was also cautiously optimistic that orders will pick up in the next couple of quarters. The company is banking on customers investing in new chip-making technologies and the PC industry (the largest end market for chips) beginning its recovery. ``This downturn, is in my recollection, the steepest and sharpest cutback in equipment spending we've seen,'' Chairman and Chief Executive James Morgan told analysts on a conference call Tuesday evening. ``I believe we're now in the bottom of this cycle, and awaiting the tipping point to recover.''
Wall Street was duly encouraged by the comments. On Wednesday, analysts reiterated their ratings and price targets (despite slashing earnings estimates), calling Applied's fiscal second quarter, ended April 29, as the bottom for orders. The company's quarterly book-to-bill ratio (the number of orders divided by the number of sales) was 0.7, indicating that fewer new orders than sales were recorded. Next quarter, many analysts figure the book-to-bill could be 1.0 or slightly higher, indicating that orders will accelerate again. Sue Billat, a Wall Street Journal All-Star analyst from Robertson Stephens, was one of the many on the Street who issued a positive report following Applied's results. She agrees bookings have indeed bottomed, and that a recovery should start in the second half of the year as chip-industry fundamentals improve and the advent of smaller and faster chips drives demand for cutting-edge chip-making equipment.
Of course, chip makers have to actually step up their ordering of new equipment for any significant recovery to get underway. And there are still quite a few unknowns in their market. The prospect of a PC upturn later this year has been the focus of much debate lately, as has the potential shape of recovery for the telecom industry.
Such uncertainties left a few on the Street, including Tia-min Pang, a Wall Street Journal All-Star analyst from SG Cowen, wondering if the company had been a bit hasty in calling the bottom. ``In calling a bottom, I thought it was somewhat unconvincing and disingenuous, because it's not really based on any hard data,'' he said. ``To call that when end markets like Cisco (NASDAQ:CSCO - news), JDS Uniphase (NASDAQ:JDSU - news) and whoever else are not seeing any sort of turn I would just say is a bit disingenuous.''
Similar criticisms have also been lobbed at Intel (NASDAQ:INTC - news), which in its first-quarter report last month essentially called the bottom for the PC market and said that it expected a seasonal uptick later this year. Sticking a flag in the sand now is difficult indeed, especially given the economy's current state. Still, Applied's executive vice president, David Wang, told analysts Tuesday that he felt the Federal Reserve's rate cuts would steer the economy in the right direction, stimulating capital investments and consumer spending. What's more, the company says it's hearing comments from its customers that also provide some fuel for optimism about a recovery starting before the end of the year.
As Applied's skeptics suggest, that isn't a whole lot to make a meal of. After all, bones aren't the nicest things to gnaw on; some meat would be much more satisfying. |
