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To: Bill Harmond who wrote (26278)	11/15/2005 6:04:57 PM
From: stockman_scott	Respond to of 57684

Applied Materials Looking Strong By Joseph Wana The Street.com 11/15/2005 13:04 <<Applied Materials AMAT is scheduled to report earnings Wednesday evening. It looks like it has had a strong quarter, but this already may be reflected in the share price -- it has run up from $16 to almost $18 this month. However, I'm more optimistic than cautious ahead of the call. Applied Materials is the largest semiconductor capital-equipment company in the world. It offers a broad portfolio of equipment, while many competitors specialize only in a particular segment. As a result, the company has one of the largest total-addressable markets in the sector and is well diversified. Due to its size and breadth, Applied Materials is often considered a bellwether for the industry. The company has been yet another beneficiary of the boom in sales of NAND flash memory, which goes into popular Christmas gadgets such as digital cameras and iPods. Applied Materials also provides equipment for flat-panel display manufacturing. Customers have shown signs that they will increase capital spending. Taiwan Semiconductor Manufacturing TSM recently reported that its fabrication plants were running at 96% of capacity last quarter and it expected roughly 100% utilization next quarter. In late September, Samsung Electronics announced plans to spend $33 billion over seven years to build new fabs and R&D facilities. Demand for Samsung's NAND flash has been strong. Other large semi-cap companies' results have been mostly positive. KLA-Tencor KLAC reported upside to its quarter, although guidance was slightly weak. Lam Research LRCX reported a positive bookings surprise and guided new orders up 5%-10% sequentially for the December quarter. Novellus NVLS reported a weak quarter and said it expected shipments to fall 5%-10%. However, this was partly due to company-specific reasons such as higher warranty costs. Applied Materials reported strong numbers last quarter. Though orders were expected by many analysts to be flat, it issued positive guidance. DRAM accounted for 23% of the value of total orders last quarter; flash memory, 14%; foundries, 10%; and logic and other orders, 53%. Applied Materials indicated that the share of foundry orders was at a recent historical low, and thus expected those to increase. It also expected increases in flash and DRAM memory sales. Since the company provided forward guidance of orders increasing sequentially for the October and January quarters, last quarter could have been the cyclical bottom for Applied Materials. For the October quarter, the consensus revenue and EPS estimates are $1.63 billion and $0.14. Company guidance was for revenue to be flat or fall slightly from $1.63 billion in the July quarter. It expected EPS of $0.13 to $0.14 and bookings for sequential growth of 5%-10% from $1.47 billion in the July quarter (which is equal to $1.54 billion to $1.62 billion). For the January quarter, consensus estimates are for revenue and EPS of $1.72 billion and $0.17. Company guidance is for orders to increase sequentially from October. Playing any earnings call is very risky because the volatility can be great and there are always factors that can't be predicted. I can't recommend it for most investors. Semi-cap companies also are more difficult to buy ahead of a quarterly report than other industries, as orders are lumpy and difficult to time by the exact quarter. But in small amounts, playing earnings calls could be a good learning experience for those who have money and can afford to take a risk. The risk/reward ratio looks positive for Applied Materials, but at current levels it's a bit richly priced. Longer term, the semi-cap companies are expected to grow, due to strong end-market demand and new product cycles. Semiconductor-device sales continue to grow. While PCs drove previous demand cycles, now it's consumer electronics and mobile handsets. New video-game consoles and iPod models should sustain this growth. Semiconductor companies that supply to these consumer device manufacturers compete on cost and performance, so their wafer fabrication facilities need to buy the latest equipment. Semiconductor geometries are decreasing from 130 nm to 90 nm to 65 nm, enabling higher speeds and smaller chips. Wafers are increasing in diameter, moving to 300 mm from 200 mm, enabling more chips to be made per wafer. With each new upgrade cycle comes a chance to take market share. The semiconductor equipment market is highly cyclical. Because a new fab can cost more than $1 billion, companies often will wait until their capacity utilization is near a maximum, and future demand is certain before building a new facility. Even individual pieces of equipment are expensive, so strong justification is needed to make a purchase. Another bearish possibility is that while semiconductor device growth has been strong this year, next year there may not be new revolutionary consumer applications such as the iPod to drive sales. Hence, a cyclical upturn could be modest, instead of sharp.>>