All year long, semiconductor equipment maker Applied Materials (NASDAQ:AMAT) has confounded the critics, beating earnings estimates right and left. On Wednesday, the company aims to close out its fiscal year 2007 with a clean sweep.

What analysts say:

  • Buy, sell, or waffle? Thirty analysts follow Applied Materials. Eighteen of them rate it a buy, 11 more a hold, and one a sell.
  • Revenues. Analysts expect to see fiscal Q4 sales fall 5.5% to $2.38 billion.
  • Earnings. Profits are predicted to drop a penny to $0.29 per share.

What management says:
Last quarter was a mixed one for Applied Materials. True, it "beat estimates," but then expectations were pretty low. To exceed them, all Applied needed to do was report a minuscule (1%) increase in sales, and a less-than-expected decline in profits. Meanwhile, new orders were down 14% year over year, suggesting continued sales weakness going forward. Where strength was found, it came in "memory demand," and additional new contracts for equipment to build thin-film solar power cells.

The company seems reticent to discuss just who is giving it the thin-film contracts. What we do know is that Applied Materials counts LDK Solar (NYSE:LDK) as one of its solar wafer making clients, and that First Solar (NASDAQ:FSLR), Energy Conversion Devices (NASDAQ:ENER), and Suntech Power (NYSE:STP) all work in the thin-film space. Whether they're the ones giving Applied Materials the business, though, remains a mystery.

What management does:
Gross margins have dipped a bit this year, as cost of materials ran slightly ahead of sales gains. Applied has mitigated the damage, however, by controlling operating costs -- which are growing less swiftly than sales. Result: A 70-basis point drop in gross margins over the past 12 months is roughly halved by the time we reach the net margins line.

Margins

4/06

7/06

10/06

1/07

4/07

7/07

Gross

45.1%

46.2%

46.8%

47.1%

47.2%

46.5%

Operating

21.3%

23.4%

24.5%

25.2%

25.6%

25.0%

Net

15.7%

15.7%

16.5%

18.5%

18.0%

17.6%

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:
As fellow Fool Anders Bylund discussed last quarter, post-earnings, it looks like Applied Materials may finally be getting its cash production machine back online. This seems primarily to be a function of better bill collection. Reviewing the last couple of quarterly reports, what I see is accounts receivable growing just 3% year over year, even as sales climbed 6% in the same period. Nice.

But while Anders believes Applied Materials is "putting to rest those cash-flow concerns," I still see one cause for concern: Namely, that inventories are up nearly three times as much as sales over the last two quarters (versus the same period from the previous year.) Inventories that stand 17% higher on average, versus the 6% rise in sales, suggest to me that the company still has room for improvement.

Sure, as I discussed on Friday, Applied Materials is now generating enough cash profits to put its stock in "cheap" territory. But I wouldn't be at all averse to seeing it wow us on Wednesday, and show us it's even more of a buy.

What did we expect out of Applied Materials last quarter, and what did we get? Find out in:

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Fool contributor Rich Smith does not own shares of any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.