from Briefing.com:
APPLIED MATERIALS (AMAT) 33 3/8 +1/2. Buy the headline, sell the reality. Probably never heard of this strategy before (actually we're sure you've never heard, because we just made it up). But this accurately depicts the market's reaction to the earnings reports of several coveted technology names over the past several months. For some reason, investors/analysts have an extremely difficult time accepting that a top technology company can find itself in an extended
period of earnings decline. Of course, if the business is as cyclical as semiconductor equipment, all one need do is look back a couple of years to see just how devastating an effect a downturn can have on a company's earnings. But back to the "buy the headline, sell the reality" observation. Applied Material shares climbed as much as 1 1/2 points this morning, after the company reported Q3 net of $0.19 a share, 3 cents above the First Call name. To those who are desperately awaiting the turnaround in this group, the headline better-than-expected EPS figure could be perceived as a sign. But we will delve a little deeper into the report. First, the tone of AMAT's press release was downcast at best. The company noted that the industry downturn deepened during Q3 and that at this time the company is unable to predict how long the cycle might last.
Translation: "No one is buying now and our backlog suggests that companies have no near-term plans to commit capital." Nevertheless, investors have bid the stock up this morning, even though the complete disappearance of earnings visibility has caused firms to begin chopping estimates for the second time in a month. For example, after company warned in mid-July, DLJ cut its FY98 and FY99 forecasts from $1.48 to $1.20 (-19%) and from $1.60 to $0.86 -46%). After latest
report, firm making further cuts, lowering FY98 from $1.20 to $1.10 and FY99 from $0.86 to $0.70. In DLJ's case, AMAT's 1999 estimates have fallen 56% in less than a month, yet the stock has gained 13% over that time. So what is likely to transpire in AMAT shares? Let's look at what happened to 3Com Corp (COMS) after a similar event occurred in June. In late-June, the networking equipment maker reported a penny better than expected Q4 net. On the news, the stock rallied more than 5 1/2 points intraday to $32.81. However, at the same time analysts were upgrading the stock, they were slashing estimates, with Gruntal & Co cutting next quarter by 46% and its fiscal 1999 outlook by 29%. Over the weeks following, the stock tumbled back to $24 (a retreat of 27%), as reality set in that the company's fundamentals were deteriorating rather than improving, despite what the headline number may have insinuated to many. |
