Foolish Forecast: Applied Materials

For the past several weeks, companies across the markets have been reporting their quarterly results. The next couple of weeks should be light on earnings news, as Wall Street takes a breather before the next quarter's earnings roll in. Rudely interrupting the analysts' nap, however, is semiconductor equipment maker Applied Materials (Nasdaq: AMAT  ) , breaking the silence with its Q2 2006 numbers by reporting earnings tomorrow.

What analysts say:

  • Buy, sell, or waffle? Thirty-two analysts follow Applied Materials, with 17 of them rating the stock a buy, 13 a hold, and two a sell.
  • Revenues. Sales are expected to climb 15% to $2.1 billion.
  • Earnings. And Wall Street will be looking for 28% profit growth to $0.23 per share.

What management says:
On May 4, Applied Materials announced its intention to acquire nanotech company Applied Films (Nasdaq: AFCO  ) , which will expand the company's business in the realms of flat-panel displays and flexible electronics, as well as in solar cells and energy-efficient glass. Applied will pay $464 million in cash for its new possession, or about $303 million after you net out the cash on Applied Films' balance sheet. Also expect some stock dilution, since Applied Materials will be assuming Applied Films' stock options and other equity award obligations to its employees.

In other news, in March, Applied Materials announced that it is cutting short last year's $4 billion stock buyback program just over halfway through its run, and replacing it with a new, $5 billion program that will run over the next three years. Prior to terminating last year's program, management spent $2.2 billion to buy back 128 million shares

What management does:
Spending $17.22 per share to buy back shares over the last year has made for a sound investment -- that's about 5% cheaper than today's price. Even at today's higher share price, $5 billion would reclaim about 17% of the company's stock. What's more, even after paying in full for Applied Films, Applied Materials would still have enough cash in the bank to make it happen.

But would the new buybacks be as prudent as the old? Let's take a look at where Applied Materials' margins have been trending. Namely, down:

Margins %

10/04

1/04

5/05

7/05

10/05

1/06

Gross

46.2

46.3

45.7

44.8

44.1

44.3

Op.

24.4

25.2

24.4

22.2

20.7

20.2

Net

16.9

18.9

18.4

19

17.3

15.1

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
A Fool has to wonder whether Applied Materials' margin slide has anything to do with the woes of one of its biggest customers: Intel (Nasdaq: INTC  ) . For some time now, we've been reading stories about how Intel has seen its market share slide as arch-nemesis AMD (NYSE: AMD  ) makes more headway. But as my fellow Fools Jack Uldrich and Steven Mallas (and well, myself) have written, Intel's a survivor, and likely to see better days ahead. If and when it does, I expect it will generate more business for Applied Materials, and we just might see those margins perk up once more. And in that case, the new round of buybacks could prove Foolishly prescient.

Competitors:

  • KLA-Tencor (Nasdaq: KLAC  )
  • LAM Research (Nasdaq: LRCX  )
  • Linear Technology (Nasdaq: LLTC  )
  • Novellus (Nasdaq: NVLS  )

Intel is aMotley Fool Inside Valuerecommendation.

Fool contributorRich Smithowns shares of Intel.


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