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Why Is Applied Materials (AMAT) Up 11% Since the Last Earnings Report?

AMAT

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A month has gone by since the last earnings report for Applied Materials, Inc. (AMAT - Free Report) . Shares have added about 11% 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 as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Applied Materials Tops on Q1 Earnings, Lags Revenues

Applied Materials reported mixed first-quarter fiscal 2017 results, with the top line missing estimates but the bottom line exceeding the same.

The company’s pro-forma earnings per share (EPS) of 67 cents in the first quarter beat the Zacks Consensus Estimate by a penny and came in at the higher end of the guided range.

Revenues

Applied Materials reported revenues of $3.28 billion, down 0.6% sequentially but up 45.2% year over year. Revenues marginally missed the Zacks Consensus Estimate of $3.29 billion but were above the guided range of $3.20 to $3.34 at the mid-point. The year-over-year revenue growth was backed by higher demand in the U.S., Europe, Taiwan, Korea, Southeast Asia and China and partially offset by lower demand in Japan.

Revenues by Segment

The Silicon Systems Group (SSG) contributed 66% of revenues, up 1.1% sequentially and 56.6% year over year.

The second-largest contributor was Applied Global Services (AGS) with 21% revenue share. Segment revenues were down 2.5% sequentially but up 8% year over year.

The Display segment was down 6.6% from the last quarter but up a massive 98.1% from the year-ago level, contributing 13% to revenues.

Revenues by Geography

Taiwan contributed 34% to revenues, Korea 20%, China 20%, U.S. 10% and Japan 7%. While Europe contributed 6%, Southeast Asia contributed 3%.

Southeast Asia and Europe were the weakest, declining 39.8% and 18.4%, respectively, on a sequential basis. China, the U.S. and Korea were up 46.7%, 9.7% and 6%, respectively. All the other regions decreased from the previous quarter.

Orders

The company generated record orders in the first quarter. Total orders of $4.24 billion were up 39.7% sequentially and a massive 86.2% year over year. Backlog for the quarter increased 12.2% sequentially to 5.5 billion.

Margins

Applied Materials generated gross margin of 45.4%, up 166 basis points (bps) from 43.71% reported in the previous quarter and 296 bps from 42.4% reported in the year-ago quarter.

Applied Materials’ adjusted operating expenses of $635 million increased 4.3% from the last quarter and 14.8% from the year-ago quarter. Operating margin of 26% increased 76 bps sequentially and 809 bps year over year.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $732 million, or 67 cents per share compared with $722 million or 66 cents in the prior quarter. In the year-ago quarter, Applied Materials had reported net income of $302 million or 26 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 recorded a net profit of $703 million (65 cents per share) compared with $610 million (56 cents per share) in the previous quarter and $286 million (25 cents per share) a year ago.

Balance Sheet

At the end of fiscal first quarter, inventories increased to $2.28 billion from $2.05 billion in the previous quarter. Accounts receivables increased to $2.37 billion from $2.28 billion in the prior quarter.

Cash and short-term investments balance was $3.49 billion compared with $3.41 billion in the prior quarter. Goodwill was 21.8% of the total assets.

The company generated $646 million in cash from operations. The company spent $64 million on capex and returned $238 million through stock repurchases and cash dividends to shareholders.

Guidance

Applied Materials also provided guidance for the second quarter of fiscal 2017. Revenues are expected between $3.45 and $3.60 billion. Non-GAAP EPS is expected to come in a range of 72 to 80 cents.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been eight upward revisions for the current quarter. In the past month, the consensus estimate has also shifted upward by 22.9% due to these changes.

VGM Scores

At this time, Applied Materials' stock has a nice Growth Score of 'B', a grade with the same score on the momentum front. However, 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 'B'. 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 and momentum investors than value investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.





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