Foolish Forecast: Applied Materials Ready to Leap

Investors in Applied Materials (Nasdaq: AMAT  ) don't usually fear earnings season. Over the last 22 reporting quarters, the company has "missed estimates" just once. But tomorrow's a bit different: Recently, the company has been able to leap Wall Street's hurdles simply by not letting its earnings decline as much as expected. Tomorrow, to make the Street happy, it will need to more than double last year's profits. Ready, set, jump!

What analysts say:

  • Buy, sell, or waffle? Twenty-nine analysts follow Applied Materials, down three from last quarter. The stock garners 15 buy ratings, 13 holds, and a sell.
  • Revenues. On average, sales are expected to climb 49% to $2.44 billion.
  • Earnings. And profits are predicted to hit $0.30 per share.

What management says:
Early last month, management announced that it had completed its acquisition of nanotech company Applied Films. The addition of this firm's sales and profits helps to explain why Applied Materials, whose profits have been sliding for quite some time, is expected to report such a large jump in profits tomorrow.

Two other things that will be explained tomorrow are:

  • A drop in the cash hoard. Although Applied Films brings with it quite a cash stash of its own, the $464 million purchase price still cost Applied Materials about $300 million cash. This, plus the renewal and upping of the stock buyback authorization, should lead to a considerable drop from the $3.3 billion in cash, equivalents, and short-term investments the firm reported at the end of last quarter.
  • Changes in the diluted share count. Although the Applied Films purchase was an all-cash transaction, it brought with it an assumption of all of that firm's outstanding "stock options and other equity awards." Buy back some basic shares here, add a few diluted shares there, and it will be interesting to see what is reported tomorrow.

What management does:
Speaking of results, Applied Materials may be starting to turn its profitability around, too -- at least before restructuring charges from the acquisition begin to bite. Rolling gross margins have been climbing for two quarters now, and the effects began to show on the operating and net margin lines as well. Don't be surprised if amortizing any goodwill involved in last month's purchase drags those two lines back down, though.

Margins %




























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:
Tomorrow will give us our first good look at the combined Applied Materials/Films. But before we see the actual numbers, let's try to get a feel for what they might be. Comparing the two firms' historical data, I see that in contrast to Applied Materials' respectable double-digit returns on both equity and capital, Applied Films' returns on both metrics were running negative over the past 12 months. This has generally held true for at least the last five years, in which the firm only once scored positive returns on both equity and capital in the same year: 2004 -- and even in that year, the returns were just a fraction of Applied Materials'.

Where the transaction starts making sense, though, is when we look at the growth stats. Over the last five years, Applied Materials' sales growth has compounded at a rate of negative 6%, and profits have fallen even faster. In contrast, although Applied Films usually loses money, at least its sales are headed in the right direction: compounding at 19.1% growth per annum over the last five years.

And so we see what investors will be hoping for over the next five years: that Applied Films will help to revive Applied Materials' growth, even as the latter's knack for making a buck begins to rub off on the former.


  • Agilent (NYSE: A  )
  • Brooks Automation (Nasdaq: BRKS  )
  • KLA-Tencor (Nasdaq: KLAC  )
  • LAM Research (Nasdaq: LRCX  )
  • Linear Technology (Nasdaq: LLTC  )
  • Novellus (Nasdaq: NVLS  )

Is Applied Materials' stock more like a yo-yo or a superball? Read Stephen Simpson's write-up on last quarter's results, and tell us what you think: "The Applied Materials Yo-Yo."

Fool contributor Rich Smith does not own shares of any company named above.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 515401, ~/Articles/ArticleHandler.aspx, 10/24/2016 7:58:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 4:00 PM
AMAT $29.15 Up +0.72 +2.53%
Applied Materials CAPS Rating: ****
A $45.85 Up +0.28 +0.61%
Agilent Technologi… CAPS Rating: ***
BRKS $13.36 Up +0.21 +1.60%
Brooks Automation CAPS Rating: ***
KLAC $74.56 Up +0.92 +1.25%
KLA-Tencor CAPS Rating: ****
LLTC $60.25 Up +0.24 +0.40%
Linear Technology CAPS Rating: ***
LRCX $98.98 Up +1.37 +1.40%
Lam Research CAPS Rating: ***
NVLS.DL $0.00 Down +0.00 +0.00%
Novellus Systems,… CAPS Rating: **