Investors in Applied Materials
With the well-publicized price war between Intel
Now here's the strange thing: Very often, when a company reports a strong past quarter, but predicts a weak one, its shares will immediately plunge. One would have thought a price collapse especially likely here, because Applied Materials coupled its weak forecast with an announcement that its CFO, Nancy Handel, intends to leave the firm early next year, and Wall Street usually views such departures with extreme suspicion.
And yet, although the stock didn't surge, neither did it fall. So it seemed to this Fool that there had to be something extra-special good in Applied Materials' news that took the sting out of the forecast for investors. Looking deeper, I found nothing definite, but the free cash flow situation, at least, looks good.
Free cash flow
Combined cash, equivalents, and short-term investments declined about $500 million since last quarter. And yet, Applied Materials spent $300 million to acquire Applied Films, $500 million on share repurchases, and another $78 million on dividends during fiscal Q3. That cash levels dropped only $500 million suggests that free cash flow generation was very positive. (Speaking of which, the reason I'm speculating about free cash flow, rather than spelling it out, is because the firm declined to include a cash flow statement with its earnings release.)
In comparison with last year, accounts receivable increased 50%, and inventories rose 25%. Large numbers both, but when compared to the 56% year-over-year sales growth, this suggests that the company is having little difficulty selling its products, and that its quality of earnings is strong. All that looks to have been enough to save the stock from the expected thrashing. This time.
What were we looking for from Applied Materials, at T-minus one day? Check our math at "Foolish Forecast: Applied Materials Ready to Leap."
In "Is Applied Materials a Buy?," fellow Fool Dan Bloom sounds an ominous note on what could happen if Applied Materials fails to beat its conservative estimates three months from now. Beware, because "semiconductor investors tend to be nervous types."