Analysts divided over Applied Materials
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August 15, 2001 06:57 PM ET
by Thomas Coyle
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NEW YORK -- When the opening bell sounded on Wednesday, Applied Materials (AMAT) was one of the technology sector's few conspicuous bright spots.
On the strength of Street-beating third-quarter numbers and a quietly optimistic outlook, the semiconductor equipment maker's stock rose even as the broad chip segment fell back. Its influence was enough to move nominal rivals -- companies like KLA-Tencor (KLAC) and Novellus (NVLS) -- higher in its trail.
By session's end, however, the chip-gear space was in tatters, and AMAT's own shares were barely in the black, as the underlying strength of the company's latest full quarter and its positive guidance became the subject of close, and at times incredulous, scrutiny.
The economy aside
At first glance, though -- and with allowances made for an ugly economic backdrop -- the company's results looked good.
Applied Materials, the biggest chip equipment maker in the world, had surpassed the consensus estimate in its third quarter, which ended on July 31, by 2 cents with earnings of 5 cents a share on sales of $1.33 billion.
Never mind -- again, given the state of the economy -- that those results were 92 percent off year-ago results in terms of earnings and 51 percent off in terms of revenue (AMAT earned 70 cents a share on revenue of $2.73 billion last year's Q3).
Forget too that its take in the previous quarter -- Q2, which ended on April 30 -- was 84 percent higher on sales that were 30 percent more robust (the company gained 32 cents a share on revenue of $1.91 billion).
Off the bat
All that mattered to investors, at least initially, was that Applied Materials, a company that stands at the very base of the electronics food chain, said it would remain profitable in the current quarter, with gross bookings roughly in line with Q3 numbers.
Investors took that as confirmation of the company's view, first aired at last month's Semicon West conference, that it is in, or that it's fast approaching, a business-cycle bottom.
Cancellations
But some wondered how a company that kept itself in the black on the strength of cost cutting could call a bottom so confidently when the rate of cancellations relative to new orders were still on the rise.
AMAT said that new orders amounted to $1.21 billion in its July quarter, down from $1.35 billion in the previous period. Q3 cancellations, meanwhile, amounted to $283 million, according to Mark Fitzgerald, an analyst with Banc of America Securities, down from $303 million in Q2.
Net bookings
In other words, net bookings were 11 percent lower in Q3 than in Q2.
John Pitzer, an analyst with Credit Suisse First Boston, who has a "hold" rating on AMAT, said the cancellation numbers flatly contradict the company's assertion that it's in the process of bottoming out.
"You're not at a bottom until cancellations go away," he said.
Backlog
But Cristina Osmena, an analyst at Needham & Co., said the deciding issue for AMAT's fourth-quarter net bookings will be backlog -- the value of its unfilled orders -- not cancellations.
"Even if cancellations remain at similar levels, I don't expect backlog adjustments to be as heavy as they were in this last quarter," said Osmena, who has a "strong buy" rating on the stock. "Therefore, the implication is that new orders might see a might sequential improvement."
Concordance
Banc of America's Fitzgerald concurred with Osmena on that point. He expects AMAT to report Q4 net bookings of $1 billion to $1.2 billion, a sequential improvement of between 8 percent and 29 percent.
Fitzgerald, who has a "buy" rating on AMAT -- "not our highest rating; it's like a 'trading buy' or an 'accumulate,'" he said -- also agrees with Osmena in thinking that the chip gear maker, broadly speaking, is in a cyclical trough.
How long?
But what keeps him from endorsing the stock wholeheartedly is a paucity of data pointing to a meaningful recovery for the chip equipment sector within a reasonable time frame.
"There's no doubt in my mind that [Applied Materials is] in the process of bottoming, but that's not the question for the stock," Fitzgerald said. "The real argument is about the slope of the recovery -- and that's what's hard to be overconfident about." |
