Will Applied Materials Earnings Keep Heading South?

Applied Materials (NASDAQ: AMAT  ) will release its quarterly report on Thursday, and looking at the stock price, you'd think that the semiconductor-equipment maker's growth prospects were assured. Yet most investors are expecting Applied Materials earnings to decline this quarter, raising questions about whether the company can produce expanding earnings in the future to justify its share-price gains.

Applied Materials doesn't make chips, but it makes the equipment that enables chip makers to make their products, as well as flat-panel TVs and monitors, and photovoltaic products for the solar industry. With so many high-demand uses, the company has plenty of potential, but it's also vulnerable to tough conditions in the various industries that it serves. Let's take an early look at what's been happening with Applied Materials over the past quarter and what we're likely to see in its quarterly report.

Stats on Applied Materials

Analyst EPS Estimate

$0.19

Change From Year-Ago EPS

(21%)

Revenue Estimate

$2.06 billion

Change From Year-Ago Revenue

(12.2%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

How can Applied Materials earnings grow faster this quarter?
In recent months, analysts have been optimistic about the prospects for Applied Materials earnings, keeping July quarter estimates steady but adding $0.02 per share to their full-year fiscal 2013 projections. The stock has climbed as well, rising almost 6% since early May.

Applied Materials has been in a protracted revenue slump. In its previous quarterly report in May, the company reported revenue down about 20%, with GAAP earnings coming in negative, reversing a year-ago profit. Applied Materials gave guidance indicating that the July quarter would have somewhat better sales, but investors didn't respond all that favorably to the news.

One of the challenges that Applied Materials faces is strong competition. Rival KLA-Tencor (NASDAQ: KLAC  ) not only has the strong leadership of CEO Richard Wallace and solid partnerships with major manufacturers like Intel and Samsung, but also has a much healthier balance sheet than Applied Materials, with KLA-Tencor's billions in cash giving it flexibility to consider strategic acquisitions or return capital to shareholders. Moreover, Lam Research managed to post better-than-expected earnings earlier this month that almost doubled year-ago levels even after adjusting for one-time gains, with growth centering on its Asian business.

Still, Applied Materials sees plenty of growth potential in its future. At its investor day last month, the company said it expected profits to hit $1.50 to $2.15 per share by 2016, suggesting earnings could more than double in just three years. As much as falling PC demand could hurt part of its business, the rise of mobile devices should more than make up for PC-related revenue losses, especially given the demand for sophisticated energy-efficient chips that demand the best equipment available.

In the Applied Materials earnings report, look to see if the company has a plan for reversing its revenue slump. Until it does, it'll be tough for the company's earnings to stop moving lower, let alone keep up with a rising share price.

Applied Materials has plenty of potential, but there's really just one stock you need to profit from the new technology revolution. Find out about it today, in our latest special report, which highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.

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