I think this article best captures the mood of the street towards techs right now.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
Applied Materials Announces Q4
Shares of Applied Materials (Nasdaq:AMAT) rose $2 27/32 to $37 23/32 today on anticipation that earnings released after the market close would be good.
Options volume was huge with more than 9,000 $35, $37 1/2, and $40 call contracts controlling almost one million shares trading hands, while 18 million individual
shares fired off. Many of these investors were literally betting that incremental information, like Applied's hiring of Bob Dylan and the Wallflowers to play at the
company's 30th anniversary party for $800,000, indicated it was going to have a blow-out quarter. Shares have risen almost $9 in the past four trading days.
Although rock solid, Applied's earnings may disappoint some speculators. The company earned $0.47 per share in the quarter, a penny above expectations and
135% above last year. Unfortunately for the bettors, this was two cents below last quarter's results. Revenues were at at record level, with Applied booking $1.28
billion in sales and $1.37 billion in orders. Revenues were up 20.2% sequentially and orders were up 10.2% sequentially from last quarter, indicating that while
activity is strong, the acceleration from the low is slowing up. Backlog stood at $1.72 billion at the end of the quarter, giving the company about 1.35 quarters worth
of sales in the hopper at the current run-rate. Overall, fiscal 1998 was flat versus fiscal 1997, an amazing performance considering that fiscal 1997 was the worst
year for semiconductor capital equipment in the last seven.
Applied reported that it continued to gain market share on the front-end, seeing solid performance in etch, physical vapor deposition (PVD), chemical vapor
deposition (CVD), chemical mechanical polishing (CMP), and rapid thermal processing (RTP). The company's gains in market share were particularly pronounced
because 40% of its sales were for 0.25 micron equipment, which is the current cutting edge technology. Applied clearly communicated that the largest vendor of
wafer tools is doing just fine right now, thank you. As always, much of the reaction will come because of the conference call. In this case it will be even more
pronounced as Applied will be able to comment on how critical Southeast Asian demand has been affected by the recent economic turmoil. The conference call
number for interested Fools is 1-800-642-1687, code 695322, available after 8:30 p.m.
The financial statement looked solid, with gross margins coming close to an all-time peak. Spending on research and developed jump to 13.7% of sales, up from
11.5% last quarter. This sequential increase in R&D is huge and communicates some confidence about Applied's position and what the market will be like in coming
quarters. Unfortunately for investors, the last time Applied was this bullish was in the first half of fiscal 1997, after which the industry suffered a bit of a slump. As for
general and administrative and sales and marketing, things were pretty much unchanged from the prior quarter. The entire decrease in operating margin came as a
result of higher R&D.
Most impressive is the fact that Applied's cash position now is more than $1.5 billion -- cash that the company could use to repurchase shares or make acquisitions.
Although it is important for any semiconductor capital equipment company to maintain an over-capitalized balance sheet because of the potential for sharp swings in
demand, Applied has a little extra cash to play with. In fact, this much cash on the balance sheet reduces the company's return on invested capital.
With Applied estimated to earn $2.13 per share in the next fiscal year, the company trades at roughly 18 times forward earnings. At 13 times forward earnings four
days ago, the stock was certainly much more attractive. Although in the end 18 will probably be attractive as well, the risk of the investment four days ago was much
lower than the risk currently because the valuation left more room for error. As the cash flows of these capital equipment vendors are very volatile, investors should
never assume that a premium valuation will be maintained for long. Thus, with the industry forecast to grow in the 19% to 21% range over the next five years and
Applied being a good chunk of that industry, expecting a 19 to 21 multiple is reasonable. |
