AMAT: Time to bail?
I’m currently in the process of evaluating my current asset allocations, as well as long-term mutual fund, bond and individual stock selections. Even though I just recently added to my Applied Materials position, I’m reviewing that holding as well.
Perhaps I made a mistake. Is AMAT destined to trade flat to lower for a long time to come? I was so anxious to lock-in short-term trading profits, I may have converted and purchased too soon. I’m now considering reversing my decision, bailing on the next move up, and most likely taking a significant hit in the process.
There’s no question that Applied is a world class company with a great future. In addition, the stock has shown it can hold up well in the face of significant sector pressure. Perhaps too well. What kind of returns can reasonably be expected when the cycle turns? How much risk is there over the short-term given the growing consensus that a long drawn out recovery is the most likely scenario?
Now that AMAT has released their quarterly earnings and the market has had time to react, I believe it’s a good time to take a look at where we’re at:
New orders were at the low end of guidance. Backlog declined. Net bookings came in below expectations and declined about 10% sequentially. Book-to-bill came in well below parity. The company is just barely turning a profit.
While forward guidance indicated sales and bookings will be flat with the July quarter, I question whether this is likely. Fab utilization rates remain ugly and there are conflicting reports of just how much inventory is still left to be absorbed. The fab rates are more important than ever because, due to being so low, they can grow 30% or more from here and there would still be no need whatsoever to increase capacity buys. In addition, back-to-school PC sales do not appear to be looking all that great and the holiday season remains completely up in the air.
Cancellations, push-outs and project delays? Will a slow recovery mean an increased focus on cost reductions and preservation of capital in order to remain profitable or in some cases, simply survive?
And what’s up with Intel? They’ve finally stopped pounding that $7.5 billion number into our brains. That huge 2001 capex budget is now mostly gone and they’ve clearly left open their plans for spending in 2002. Have they already spent enough to ensure their technological lead within their sector? Are they now safe to relax their spending a bit knowing they can easily match any future competitor’s actions and maintain their lead position? Is it time for a little more cost cutting of their own?
Then there’s AMAT’s current valuation. The stock price is already reflecting the majority of what they can reasonable expect to earn in the next up-cycle. Certainly the stock can (and probably will) overshoot to the upside when things look rosy again, but I don’t know if we can continue to count on that possibility. Similar to what we have experienced with this current cycle down-turn, investors seen to be more aware of what can be expected and may begin taking profits earlier than in the past, thus limiting any advance.
I'm going to sleep on it tonight, but I may even bail tomorrow before the new book-to-bill numbers come out. I suspect that there will come an opportunity to buy AMAT back at lower levels. If not and it trades flat, I may not be missing much going forward.
AdvocateDevil |
