Applied Materials Crushes Expectations (News) November 18, 1999

Applied Materials Crushes Expectations

By Richard McCaffery (TMF Gibson)
November 18, 1999

Investors in the semiconductor capital equipment market are a tough crowd to please.

Semiconductor equipment manufacturer Applied Materials (Nasdaq: AMAT) reported fiscal fourth quarter net income (excluding one-time charges) of $307 million, or $0.77 per diluted share, last night, compared to income of $8 million, or $0.02 per share, last year.

The results blew away analyst estimates of $0.64 as sales conditions in Asia continued to improve, prices for memory chips strengthened, and demand for crucial semiconductor products increased. Applied Materials is the world's biggest manufacturer of semiconductor fabrication equipment, kind of the Intel (Nasdaq: INTC) of its crowd.

The worldwide explosion of communications equipment and devices requiring sophisticated microchips has added a deep revenue stream for chip builders and the companies that build the expensive equipment they rely on. Extensive investment and product development over the last two years is helping the company grab market share.

Still, shares of Applied Materials fell more than $3 to $106 5/8 in trading, which is surprising since the company reported a 13% rise in new orders as a result of strong demand from chip makers in the U.S., Taiwan, Europe, and Japan. New bookings stand at a record $1.65 billion.

After last quarter's earnings report, Applied Materials also traded down despite posting solid gains in all categories except new bookings, which grew just 5% sequentially. (Click here for the story).

New bookings are watched closely due to the volatility of supply and demand in the semiconductor industry. Companies like Applied Materials are influenced by the prices of memory chips, economic conditions, and demand for new equipment from manufacturers. The sector has performed well this year after emerging from a wicked slump in 1998.

An analyst at ABN Amro this morning downgraded the stock to "outperform" from "buy," though this rubbed against the grain of prevailing sentiment as analysts at Banc of America and Robertson Stephens reiterated "buy" and "strong buy" recommendations.

The 200% gain in the company's stock over the last 12 months is probably responsible for some of the sell-off as skittish investors looked to cash in on a quick two-bagger. But it's hard to justify the move based on the latest figures.

Both gross margins and net margins increased sequentially and year over year. Gross margins now stand at 50%, with net margins at a very healthy 19.6%. One reason margins are key to investors in this sector is that, as a rule, companies with the best margins are doing the best job differentiating and improving products. Companies that can't offer chip makers the latest technology in this fast-changing field get left behind.

Operating margins slipped slightly, to 23% from 24%, but are still well above the 15% threshold that investors in this industry should look for.

The company also has plenty of working capital, with more than $5 billion in current assets and just $1.7 billion in current liabilities. In the event of a downturn, it has the financial strength to ride out the storm with nearly $3 billion in cash and short-term investments, and just $2.4 billion in long-term liabilities.

For the year, sales grew 20% to $4.86 billion. It's worth noting that the company's growth rate is a lot higher than the industry's growth rate, which means it's grabbing market share. It captured about 21% of the estimated $23 billion semiconductor equipment market in 1999, compared to 18% last year, according to data from the Semiconductor Equipment and Materials Industry, a nonprofit trade association.

Ongoing net income jumped to $748 million, or $1.89 per diluted share, up 79% from $417 million, or $1.10 per diluted share, last year. This was well ahead of analysts' fiscal 1999 estimates of $1.73.

Applied Materials offers investors an alternative way to invest in the semiconductor market. The company is the leading player in a market expected to grow to $50 billion in 2004, up from $23 billion today -- a 17% compound annual growth rate. Applied Materials should be on semiconductor-oriented investors' radar screens.

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