Attention, semiconductor fans. It's time once again to tune in for the earnings news from one of the leading suppliers of the high-tech stuff that makes other high-tech stuff: Applied Materials (NASDAQ:AMAT). Full-year and fourth-quarter 2006 earnings are due out Wednesday.

What analysts say:

  • Buy, sell, or waffle? Thirty-one analysts follow Applied Materials, which garners 16 buy ratings, 14 holds, and a sell.
  • Revenues. On average, analysts think that the acquisition of Applied Films helped push Applied Materials' quarterly sales up 48% to $2.55 billion.
  • Earnings. Profits are predicted to rise 82% to $0.31 per share.

What management says:
About a week ago, Applied Materials announced it is spending $125 million to acquire Brooks Software, the factory management and control software arm of Brooks Automation (NASDAQ:BRKS). Prior to that, the big news at Applied Materials was its CFO switcheroo. George Davis, currently the company's head of corporate business development, will replace Nancy Handel, CFO since 2004 and a 21-year veteran of Applied Materials, whose retirement was announced back in August.

And then there was the really big news (in two parts). In September, management announced that its "accelerated stock buyback" program had crossed a real milestone -- accomplishing the repurchase of a full 10% of shares outstanding, 154 million shares in all. What's more, the firm authorized another $5 billion in future buybacks, which if implemented in full would suffice to take another 290 million shares (18% of the remaining share count) off the market.

What management does:
Why all the interest in bringing shares in-house? Applied has been doing an admirable job of improving its operations, even as the market has done little to improve its stock price, so perhaps management simply smells a bargain here. Rolling gross margins have been climbing for three quarters straight, rolling operating margins for two, and rolling net margins -- well, at least they're stable against last quarter.

Margins %

5/05

7/05

10/05

1/06

4/06

7/06

Gross

45.7

45.2

44.1

44.3

45.3

45.9

Op.

24.4

22.6

20.7

20.2

21.3

23.1

Net

18.4

19.0

17.3

15.1

15.7

15.7
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:
Buying companies left and right, and shares up and down ... the rate this company is going about both endeavors is enough to get a Fool to wondering where all the purchase cash is coming from. Happily, the answer to that question appears to be "not necessarily from debt," and perhaps even "from cash flow."

At last report, Applied Materials had $2.8 billion in cash on its balance sheet, and was generating free cash flow of a little more than $300 million per quarter. The Brooks Software buy, plus the buybacks occurring this quarter, will have consumed about $2.7 billion -- meaning that when all is said and done, we could well learn on Wednesday that even after all the buying, the company still has nearly half a billion bucks on its books. Not enough to finance the full $5 billion additional buyback it has announced -- but with free cash flow still copious, and enough time to work with, I'll bet Applied can eventually pull it off.

Competitors:

  • Agilent (NYSE:A)
  • KLA-Tencor (NASDAQ:KLAC)
  • LAM Research (NASDAQ:LRCX)
  • Novellus (NASDAQ:NVLS)
  • Varian Semiconductor Equipment (NASDAQ:VSEA)

What did we expect to see from Applied Materials last quarter, and what did they crank out? Find the answers in:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.