Optimism at Applied Materials

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Shares of Applied Materials (Nasdaq: AMAT) got a nice bump in after-hours trading yesterday, as the chip-equipment maker forecast an upturn in its earnings report.

While fourth-quarter sales were down 16% year over year, they were up 12% sequentially to $1.22 billion. More importantly, new orders increased 21% from the third quarter to $1.28 billion, giving the company a positive book-to-bill ratio.

Spurring further optimism, Applied Materials expects new orders in the current quarter to rise another 20% sequentially.

According to CEO Mike Splinter, strength in notebook PCs and communications products drove the current uptrend. He also said that chip makers are now running at 90% capacity. New order growth reflects confidence in the end markets, as chip makers would rather accept possible short-term overcapacity than risk not being able to keep up with demand.

In contrast to earlier this year, things are looking up. The company is in solid shape, with $5.5 billion in cash and about half a billion in debt. Along with sales, ongoing gross margins -- excluding charges from its restructuring program -- improved sequentially from 40.2% to 40.5%. Pro forma earnings came in at $95 million, or $0.06 a share.

For the first quarter, Applied Materials expects revenue between $1.28 billion and $1.32 billion, and pro forma earnings between $0.06 and $0.08. The company also expects to complete its restructuring program during the quarter.

While optimism abounds, this is clearly reflected in the company's $43 billion market cap. The stock has doubled over the past year, and leaves little margin of safety at over 50 times this year's earnings.

Is there still upside in Applied Materials? Vent your thoughts on the Applied Materials discussion board. Only at Fool.com.

Jeff Hwang can be reached at jhwang@fool.com.