AMAT
Applied Materials [AMAT:Nasdaq] will report Q4 results after the close on Wednesday. The leading maker of semiconductor equipment was set to call Q4 as the bottom for itself and the industry – until 9/11, and the accelerated slowdown that followed. We believe signs point to a bottoming in orders in the Q1 or Q2 of fiscal 2002, and a bottoming in revenues during the same period. CEO James Morgan should be typically conservative in his official statement and in the conference call, and we expect he will caution toward a flat performance for the company for most of fiscal 2002. And while this falls in line with our pre-9/11 expectations, it presents a more severe scenario than the market has priced into the shares (at 87x 2002 earnings estimates and 28x 2003 estimates). We are therefore moving our rating to Negative ahead of the report, but would be quick to return to Neutral, should the stock depreciate in coming weeks.
Applied is expected to earn $0.04 per share, according to First Call, lower than the $0.05 per share earned in Q3. Sales of $1.24bn would be down 7% sequentially, and down 58% from last year. In its latest quarter, Tokyo Electron, the second-largest equipment maker, reported a 36% year-over-year decline in sales.
Originally in August, Applied guided toward a Q4 that would be flat with Q3. But 9/11 has changed the scenario. And while the company did not change its guidance when announcing in late September a workforce reduction of 2,000, or 10% of the total, it has changed its strategy from being prepared for a quick recovery in early 2002, to girding up for a prolonged slowdown that may last through the whole of next year.
Matching last quarter, the company can boast of at least one $100m+ order in Q4 – this a $200m order from Grace Semiconductor, in China. This may help Applied match its guidance for $1.2bn in orders in Q4 (flat with the Q3), though how the order will be recorded is not yet known, as the Grace plant is still in a nascent stage. Orders for new 300mm wafer systems should provide some stability, given the relatively stable spending plans of the world’s largest chipmakers, even in the face of the macroeconomic slowdown. However, we would not venture to guess what percentage of this quarter’s orders went to leading-edge technologies – last quarter 76% of new orders were leading-edge related.
Applied doesn’t want to set itself up for a fiscal 2002 scenario it can’t deliver on, so we expect the company to be fairly conservative in outlook and guidance. This could put near-term pressure on the shares.
Market Timing
From the Technical Desk
Applied Materials [AMAT: Nasdaq] is facing strong intermediate-term resistance at the $40 area. Look for shares to retreat from the resistance and the overbought levels to support at $35.50 in two to four weeks. Shares are trading at $40.26.
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