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Applied Materials (AMAT) Down 7.9% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Applied Materials, Inc. (AMAT - Free Report) . Shares have lost about 7.9% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is AMAT due for a breakout? Before we dive into how investors and analysts have reacted as 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.

Recent Earnings

Applied Materials reported robust fiscal second-quarter 2018 results, with both the top and bottom lines surpassing the Zacks Consensus Estimate.

The company’s pro-forma earnings per share (EPS) of $1.22 beat the consensus mark by 9 cents and came in above the guided range of $1.10-$1.18 per share. Earnings were up 15% sequentially and 55% year over year.

Revenues of $4.57 billion beat the consensus mark by $115 million and were above the guided range of $4.35-$4.55 billion, increasing 8.6% sequentially and 28.8% year over year. The revenue growth was backed by higher demand in most of the regions.

Inflection-focused innovation strategy was the primary growth driver. The company continues to witness technological advancements in semiconductor and flat-panel display areas. 3D NAND, DRAM and patterning have led to significant market share gains.

Applied Materials has well-differentiated products, and high market share in foundry and logic. It is significantly improving on its memory market share as well. Management expects robust double-digit growth in semiconductor, display and service businesses in 2018.

Applied Materials remains strongly positioned in China, where it continues to witness robust growth in semiconductor and display. Growing investments from Chinese domestic manufacturers have been the main catalysts.

Notably, the company has gained considerable success in expanding beyond semiconductors, particularly in display. Mobile OLEDs and large screen televisions are opening new market opportunities for Applied Materials.

Applied Materials sees significant opportunities from emerging trends on the semiconductor and display fronts such as artificial intelligence, big data, cloud infrastructure, Internet of Things (IoT), virtual reality and smart vehicles.

We believe that Applied Materials is in a great position to grow sustainably and profitably based on its strong pipeline of enabling technologies, supported by expanding opportunities on the semiconductor, service and display fronts.

Let’s delve deeper into the numbers.

Revenues by Segment

The Semiconductor Systems Group (SSG) contributed 65.7% of the revenues, reflecting an increase of 5.3% sequentially and 24.8% year over year.

Applied Global Services (AGS) was the second-largest contributor with 20.7% revenue share. Segment revenues increased 7.2% sequentially and 30.2% from the prior-year quarter.

The Display segment was up 31.9% from fiscal first-quarter and 53.5% from the year-ago level, contributing 13.1% to the revenues.

Revenues by Geography

Korea contributed 27% to the revenues, China 25%, Taiwan 16%, Japan 11%, United States 9%, Europe 7% while Southeast Asia 5%.

On a sequential basis, Taiwan was the weakest, declining 3.8%. All the other regions improved sequentially.

Similarly, on a year-over-year basis, only Taiwan decreased 15.8%. All the other regions showed improvement.

Margins

Pro-forma gross margin was 46.7%, flat sequentially but up 40 basis points (bps) from the year-ago quarter.

Applied Materials’ operating expenses of $724 million increased 5% sequentially and 14% from the year-ago quarter. Operating margin of 30.2% increased 60 bps sequentially and 240 bps year over year.

Net Profit

On a pro-forma basis, Applied Materials reported net income of $1.27 billion or $1.22 per share compared with $861 million (79 cents per share) a year ago.

Our pro-forma calculation excludes restructuring, acquisition-related, impairment and other charges, as well as tax adjustments in the reported quarter.

On a GAAP basis, the company registered a net profit of $1.13 billion ($1.09 per share) compared with $824 million (76 cents per share) a year ago.

Balance Sheet

At the end of fiscal second quarter, inventories increased to $3.49 billion from $3.13 billion in the previous quarter. Accounts receivables increased to $2.67 billion from $2.18billion in the prior quarter. Cash and cash equivalent balance was $5.35 billion compared with $6.8 billion in the prior quarter.

The company generated $611 million in cash from operations. The company spent $121 million on capex, and returned $2.5 billion and $105 million through stock repurchases and cash dividends, respectively.

Guidance

Applied Materials provided guidance for the third quarter of fiscal 2018. Revenues are expected between $4.33 billion and $4.53 billion, up 18% year over year. The Zacks Consensus Estimate is pegged at $4.50 billion.

Non-GAAP EPS is expected to come in the range of $1.13-$1.21 per share, up 36% from the year-ago quarter. The Zacks Consensus Estimate is pegged at $1.14 per share.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to three lower.

Applied Materials, Inc. Price and Consensus

VGM Scores

At this time, AMAT has a great Growth Score of A, though it is lagging a lot on the momentum front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Based on our scores, the stock is more suitable for value and growth investors than momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, AMAT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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