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The Zacks Analyst Blog Highlights: Applied Materials, Lam Rearch, Novellus Systems, KLA-Tencor and CA Technologies

AMAT LRCX KLAC CA

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For Immediate Release

Chicago, IL – February 16, 2012 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Applied Materials, Inc. (AMAT - Analyst Report), Lam Rearch (LRCX - Snapshot Report), Novellus Systems, Inc. , KLA-Tencor Corporation (KLAC - Analyst Report) and CA Technologies (CA - Analyst Report).

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Here are highlights from Wednesday’s Analyst Blog:

Earnings Preview: Applied Materials

Applied Materials, Inc. (AMAT - Analyst Report) is scheduled to announce its fiscal first-quarter 2012 results on February 16, 2012. We witness only one upward movement in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

AMAT’s fourth quarter 2011 pro forma earnings were in line with the Zacks Consensus Estimate as lower revenue and margins were partially offset by strong opex management and a lower-than-expected tax rate.

Revenue growth was weak across the Display and EES (solar) segments, with the Silicon Systems Group (SSG) performing in line with expectations. However, AMAT’s penetration in Asiadeepened significantly, helping the Applied Global Services (AGS) segment exceed expectations.

Orders in the quarter were down 33.0% sequentially due to order declines in display (-91% sequentially) and EES (-3% sequentially). The lower demand for TVs and mobile devices in the Display segment and excess capacity in the EES segment were the main reasons for the decline. Gross margins also declined sequentially to 39.6% aslower volumes impacted cost absorption.

First Quarter Guidance

AMAT now projects first quarter revenue to decrease 5–15% sequentially, with SSG (including Varian) increasing 5–20% sequentially, AGS declining 10–20% (the combined effect of lower 200mm sales, lower utilization rates and the absence of thin film revenue), and Display and EES also falling 40–60%.The non-GAAP EPS is expected to come in at 8–16 cents a share. For the first quarter, the Zacks Consensus Estimate is pegged at 12 cents.

(Detailed earnings results can be viewed in the blog titled: Applied Offers Murky Outlook).

Agreement of Analysts

Out of the 17 analysts providing estimates for the first quarter, none made any revisions in the last 30 days. For fiscal 2012, only 1 analyst made an upward revision over the same 30-day time period.

A few analysts expect a decent first quarter with earnings and revenue at the high end of the guidance but remain concerned about gross margins due to the increased exposure to Samsung.

The analysts believe that Display and EES sales will fall, but be in line with guidance, due to the ongoing solar and LCD panel inventory glut. They believe that pressure in both Display and EES will partially be offset by growth in Silicon, helping revenue to come in modestly above the mid-point of guidance, consistent with its peers including Lam Rearch (LRCX - Snapshot Report), Novellus Systems, Inc. and KLA-Tencor Corporation (KLAC - Analyst Report).  

Additionally, though analysts see upside potential for Silicon orders, they do not anticipate an order recovery in Display or EES segments in the to-be-reported quarter, indicating continued sluggishness in these markets for some time.

However, a handful of analysts believe that the display business will improve in the upcoming quarter, banking on investments in LCD/OLED that they expect will enable recovery.

Magnitude of Estimate Revisions

In the past 30 days, there was no change to the Zacks Consensus Estimate for the first quarter but it increased a penny to 80 cents for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate fell 6 cents to 12 cents for the first quarter and 22 cents for fiscal 2012.

The significant decline of 22 cents in the Zacks Consensus Estimate for 2012 clearly indicates the uncertainties in the semiconductor business and echoes the general pessimism for both display and solar in 2012.

Our Recommendation

We do not expect a strong first quarter due to limited visibility and lower overall semiconductor equipment spending levels. Though we believe that there is potential in the solar energy market over the long term, we remain cautious about the company's efforts since management has already missed several targets to bring its solar division to profitability.

We remain positive about Applied’s strong position in the semiconductor market, the solar business in China, a vast portfolio and strategic relationships, which will however be less effective in the current market scenario.

Applied, which competes with other large equipment makers, such as KLA-Tencor, Lam Research and Novellus Systems, holds a Zacks #3 Rank that translates into a short-term Hold rating.

CA Offers New Solutions

Computing major CA Technologies (CA - Analyst Report) has recently made some strategic moves, which reiterates the fact that cloud computing and enterprise services are the two main areas of development for the company. CA is leveraging its cloud computing expertise and rolling out innovative solutions to grow its business.

CA has recently integrated its new cloud offering CA AppLogic turnkey platform with International Game Technology’s (IGT) IGT Cloud for delivering advanced casino software and better gaming experience to the end user.

IGT is trying to capitalize on the expertise of CA’s cloud computing platform in order to enhance its operational efficiency, and shift focus from infrastructure, maintenance and operations to innovative product development. 

The cloud computing segment of the company is slowly gaining traction and the new orders in this segment include the Cal Credit Card company, which deployed its "Safe Shopping" system deploying CA Arcot TransFort for Issuers. This software provides 3-D secure authentication and fraud prevention services for card processors and issuers.

This cloud-based solution provides multiple layers of protection and identity verification during a shopping transaction, where the cardholder is not present physically. These solutions are user-friendly and also time-saving and thus attract more companies to implement them.

CA Inc.’s emerging opportunity in the virtualization/cloud computing space is significant and could help accelerate growth over the next 2-3 years. Cloud computing leads to increased service and elevated security requirements for the companies that use them and CA's product portfolio is well positioned to benefit from it.

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