How Intel and Taiwan Semi Could Push Applied Materials Higher

Applied Materials (AMAT +4.88%) will release its quarterly report on Thursday, and investors have lately sent the stock to levels it hasn't seen since before the financial crisis. After struggling through a period of weak demand for the chipmaking equipment that it sells, Applied Materials hopes that a big merger will help it take advantage of improving industry conditions when Intel (INTC +12.93%) and Taiwan Semiconductor (TSM 1.75%) start experiencing a cyclical boost in their chip production activity.

Behind every popular consumer electronics product that you own, there's a company that helped produce the equipment that in turn built your device. Applied Materials is one of the companies that makes that process possible, with its equipment helping customers create big-screen TVs, photovoltaic products for the solar industry, and semiconductor chips for a variety of applications. Facing tough competition, Applied Materials announced a merger that could give it even greater share of its lucrative market and meet even more of Taiwan Semi's and Intel's needs. 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 report.

Stats on Applied Materials

Source: Yahoo! Finance.

How can Applied Materials keep its earnings moving higher?
Analysts have pulled back on their earnings views about Applied Materials in recent months, cutting October-quarter estimates by about 10% and trimming $0.04 per share from their full-year fiscal 2014 projections. The stock, though, has climbed nicely, rising 14% since early August.

Applied Materials started seeing some encouraging signs in its markets when it reported July quarter results, even though investors weren't entirely happy with the numbers. The equipment-maker pointed to rising demand for mobile devices and large-screen televisions as helping to boost its equipment business. Yet missing earnings expectations and giving flat revenue guidance didn't fit well with Applied Materials' bullish story.

But Applied Materials is taking steps to take advantage of initiatives from Intel to ramp up its mobile-chip presence and Taiwan Semi's attempts to capture more of the broader semiconductor market. Promoting president Gary Dickerson to become its new CEO gives Applied Materials a more competitive bent, as Dickerson worked for rival KLA-Tencor for 18 years before moving to Varian Semiconductor, which Applied Materials bought out two years ago.

The biggest news of the quarter came in September, when Applied Materials said it would merge with Japan's Tokyo Electron in a deal that will combine the No. 1 and No. 3 players in the industry to create an even bigger colossus. Given the scope of the deal, it might be hard for the merger to survive antitrust scrutiny, but if it does, it could help push Applied Materials' growth rates higher and put it in better position to benefit from cyclical demand from Intel and Taiwan Semi,as well as its display and solar customers.

In the Applied Materials earnings report, watch for a status update on the Tokyo Electron merger. With so much at stake, it's important for Applied Materials to work as hard as possible to move forward with the merger, while still having contingency plans for future growth even if regulators quash the deal.