FROM THESTREET-Investors Want Applied Materials to Deliver on Orders
By Marcy Burstiner
Staff Reporter
2/16/99 9:00 AM ET
SAN FRANCISCO -- The pressure is on for Applied Materials (AMAT:Nasdaq)
CEO James Morgan.
The bellwether semiconductor equipment company is scheduled to report
first-quarter earnings Tuesday after the market closes. Investors who
have run the stock up 183% since Oct. 8 -- a performance that's 156
percentage points better than the S&P 500 -- now demand some bang for
their bucks.
Expectations are high that Applied Materials will see an explosion in
the value of new equipment orders -- the pulse rate of the industry.
Three months ago, Morgan told investors that the company would likely
produce some $675 million in new orders in the first quarter, but the
numbers floated out on the Street are between $800 million and $950
million. That means that Morgan has to better his own guidance by at
least 19%.
"I'm a little concerned that expectations are more than the company's
ability to deliver," says William Keithler, a portfolio manager with
Invesco Strategic Technology Fund, which holds about $400,000 worth of
Applied Materials stock. Still, he says, company rivals Teradyne (TER
:NYSE), KLA-Tencor (KLAC:Nasdaq) and Lam Research (LRCX:Nasdaq) recently
beat the Street's estimates, so it's likely that Applied Materials, as
the industry leader, will also surprise.
If it doesn't, the stock will drop, Keithler reasons, giving him the
opportunity to buy. "We would take advantage of that," he says.
Investors are more patient on earnings growth. First Call reports a
24-analyst consensus for a profit of 6 cents a share, which would be 1
cent less than Applied Materials delivered in the previous quarter. Most
analysts now expect the final results for the first quarter to be about
8 cents, but that's down from a profit of 52 cents a share for the same
period last year.
Regardless, expectations of $850 million in new orders and EPS of 8
cents are already built into the stock price, says Gerry Fleming, an
equipment analyst with Van Kasper & Co., who has a hold rating on the
stock. "It will sell off on the numbers," he predicts. A sharp industry
rebound in the second half of the year is already discounted in the
stock price, and he expects to see a plateau that will last for the next
few months. (Van Kasper does not have an underwriting relationship with
Applied Materials.)
Brett Hodess, who covers the company for NationsBanc Montgomery, says
that the total value of new orders isn't as important as net orders,
which would also take into account orders canceled within the quarter.
Of the $684 million in new orders received last quarter, he says, $90
million were subsequently canceled. This time Hodess expects net orders
to be above $700 million and EPS of 8 cents. Most of that is built into
the current stock price. (Montgomery does not have an underwriting
relationship with Applied.)
Applied Materials shares are trading near an all-time high, with a
price-to-earnings multiple of more than 100 at Friday's close of 66 7/8.
Given that valuation, what could drive the stock higher? The shifting of
chip production from 0.25 micron technology to 0.18 micron, says Salomon
Smith Barney analyst Melind Bedekar. The shift is forcing chip companies
such as Micron (MU:NYSE) and Intel (INTC:Nasdaq) to buy new equipment,
even if they aren't building new manufacturing plants. And companies
like Applied, with a diverse range of new products to offer, benefit
most from this technology.
And that, Bedekar says, is not quite built into the stock price. He has
a buy rating on Applied Materials with a 12-month price target of 72,
making him one of the most bullish analysts on the Street. But investors
might have to wait a bit before the next rise, he adds. "The industry
has always been a stop-and-go sector," he says. (Salomon Smith Barney
does not have an underwriting relationship with Applied.)
Concerned about the future of Net stocks? TSC is holding a special
summit on Feb. 19 to discuss the Internet sector. Join columnists James
J. Cramer and Herb Greenberg, Andy Kessler of Velocity Capital, Nicholas
Moore of Jurika & Voyles, CIBC Oppenheimer's Henry Blodget, Internet
Fund manager Ryan Jacob and Brian Salerno of Munder Capital. You'll be
able to listen to a live broadcast of the event and later read the
transcripts -- but first, help us shape the discussion. Visit this page
for the details.
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