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Applied Materials (AMAT) Up 9.3% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Applied Materials, Inc. (AMAT - Free Report) . Shares have added about 9.3% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Applied Materials Beats on Q3 Earnings and Revenues

Applied Materials reported robust third-quarter fiscal 2017 results, with both top and bottom line surpassing our estimates. The company’s pro forma earnings per share (EPS) of 86 cents beat the Zacks Consensus Estimate by 3 cents and came in toward the higher end of the guided range.

Revenues

Applied Materials reported revenues of $3.74 billion, increasing 5.6% sequentially and a massive 32.7% year over year. Revenues beat the Zacks Consensus Estimate by a slight margin and were at the high end of the guided range of $3.60-$3.75. The revenue growth was backed by higher demand in most of the regions.

Revenues by Segment

The Silicon Systems Group (SSG) contributed 68% of revenues, reflecting an increase of 5.3% sequentially and 41.8% year over year. The second-largest contributor was Applied Global Services (AGS) with 21% revenue share. Segment revenues increased 8.6% sequentially and 19.6% year over year. The Display segment was up 4.9% from the last quarter and 31.0% from the year-ago level, contributing 11% to revenues.

Revenues by Geography

Korea contributed 34% to revenues, China 21%, Taiwan 16%, Japan 12% and U.S. 10%. Europe contributed 5%, while Southeast Asia contributed 2%.On a sequential basis, Taiwan, the U.S. and Southeast Asia were the weakest, declining 29.7%, 6.3% and 4.6%, respectively, on a sequential basis. All the other regions improved sequentially. On a year-over-year basis also, Taiwan and Southeast Asia decreased 18.1% and 65.7%, respectively. All the other regions increased.

Margins

Applied Materials generated pro forma gross margin of 46.6%, up 290 basis points (bps) from the year-ago quarter. Applied Materials’ adjusted operating expenses of $677 million increased 13.6% from the year-ago quarter. Operating margin of 28.7% increased 590 bps year over year.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $931.4 million, or 86 cents per share compared with $861 million or 79 cents in the prior quarter. In the year-ago quarter, Applied Materials had reported net income of $546.5 million or 50 cents per share.Our pro-forma calculation excludes restructuring, acquisition-related, impairment and other charges as well as tax adjustments in the reported quarter. On a fully diluted GAAP basis, the company registered net profit of $925 million (85 cents per share) compared with $824 million (76 cents per share) in the previous quarter and $505 million (46 cents per share) a year ago.

Balance Sheet

At the end of fiscal third quarter, inventories increased to $2.88 billion from $2.61 billion in the previous quarter. Accounts receivables increased to $2.26 billion from $2.38 billion in the prior quarter. Cash and short-term investments balance was $5.28 billion compared with $4.94 billion in the prior quarter. Goodwill was 17.6% of the total assets. The company generated $1.37 billion in cash from operations. The company spent $80 million on capex and returned $482 million through stock repurchases and cash dividends to shareholders.

Guidance

Applied Materials also provided guidance for the fourth quarter of fiscal 2017. Revenues are expected between $3.85 and $4.0 billion, better than the Zacks Consensus Estimate of $3.66 billion. Non-GAAP EPS is expected to come in the range of 86-94 cents, a lot higher than the consensus mark of 81 cents.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last month as none of them issued any earnings estimate revisions. In the past month, the consensus estimate has shifted by 11.7%.

Applied Materials, Inc. Price and Consensus

VGM Scores

At this time, Applied Materials' stock has a great Growth Score of A, though it is lagging a lot on the momentum front with an F. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than value investors.

Outlook

The stock has a Zacks Rank #1 (Strong Buy). We are looking for an above average return from the stock in the next few months


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