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.

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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.


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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.