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Applied Materials, the giant semiconductor equipment maker, has seen its shares make an amazing recovery in 2019 -- even before the industry sales and profits confirmed their cycle lows.
To illustrate this, consider that in the middle of 2018, the EPS consensus for AMAT's next fiscal year (starting in Nov 2018) was $4.50. Then in the second half of 2018, estimates plunged on trade war worries and concerns that ole' bogey man, the semiconductor cycle, had just peaked.
Applied Materials, maker of wafer fabrication equipment (WFE) that helps chip companies make their wares, completed their FY19 (ended October) with full year EPS of just $3.04. But long before then, AMAT shares surged nearly 60% from the low $30s to mid $50s.
2019 was certainly a confusing time to be a chip investor. And it didn't necessarily get easier to understand when AMAT reported their Q419 on November 14 and shares jumped to fresh all-time highs above $60 as the company revealed a healthy upside boost to 2020 earnings guidance.
My colleague Ben Rains wrote about the results last month...
Applied Materials is a semiconductor equipment firm that has been on a tear in 2019 despite the fact that its sales and earnings fell for four straight periods. The company with a $55 billion market cap is a leader in “materials engineering solutions” that are used to make “virtually every new chip and advanced display in the world.”
The Santa Clara, California-headquartered firm is, of course, not alone in the notoriously cyclical semiconductor and chip industry. Big-names also posted four straight periods of declining revenues. But this is not totally unusual for chip firms, especially when they come up against hard-to-compare periods of outsized success.
Luckily, Applied Materials and others impressed Wall Street with their guidance. And the reason is relatively simple: every tech company relies on semiconductors and they will remain essential backbones of the technological revolution for years to come.
AMAT’s first quarter fiscal 2020 guidance came in well above Wall Street estimates, as signs of a recovery in demand continue. “Applied Materials’ fourth quarter results reflect a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company,” Applied Materials CEO Gary Dickerson said in prepared remarks.
“The semiconductor industry is increasingly adopting a new playbook for improving chip performance, power, area and cost, and we are investing in unique solutions to enable our customers’ success in the AI-Big Data era.”
(end of excerpt from Ben's November article)
From Cycle Peaks Come Cycle Troughs
After the company presentation and reinvigorated outlook, Wall Street analysts lifted AMAT EPS consensus 14% for FY20 (started in Nov) from $3.30 to $3.77, representing 24% growth.
On the topline, revenues are expected to recover 14% to $16.65 billion (the FY18 peak was $17.25B). And so it looks like the dreaded "semi cycle" was short and sweet -- if you held on to your stocks during the December 2018 rout.
And CEO Gary Dickerson knows why. In fact, he's known for years. Here's what Lizzy Gurdus wrote for CNBC in September 2017 after an interview with “Mad Money” host Jim Cramer...
Dickerson said that waiting for operating system upgrades and new mobile phone iterations may define the tech cycles of today, but the main focus will soon turn to the race for competitive AI.
“In the future, you’ve got transportation, health care, entertainment. All of these will change in amazing ways and create trillions of dollars of economic value. So you also have this war for AI architecture leadership that probably will be the biggest battle of our lifetime,” the CEO said.
Dickerson knows that big-data and AI progress will keep driving demand for more-advanced semiconductor capabilities and configurations, thus fueling a Renaissance of hardware development and investment.
Exponential AI is Exhausting Capacity
Prodigious technology analyst and writer Tiernan Ray (formerly of Barron's) covered for ZDNet.com a recent Silicon Valley conference of semiconductor executives discussing what to do about "the explosion in demand for deep learning forms of A.I. that is pushing at the limits of today’s chips."
Applied Materials, the dominant maker of tools to fabricate transistors, sponsored a full day of keynotes and panel sessions on Tuesday, called the "A.I. Design Forum," in conjunction with one of the chip industry's big annual trade shows, Semicon West.
After talking about the dramatic slowdown in Moore's Law to sub 5% performance improvement, Ray wrote "Dickerson went on to claim that A.I. workloads in data centers worldwide could come to represent as much as 80% of all compute cycles and 10% of global electricity use in the next decade or so."
This paragraph from Ray's article struck me as especially interesting because it describes Dickerson's challenging role in having to figure out what equipment a Micron will need for the next generations of memory chips...
That means the industry needs to seek many routes to solutions, said Dickerson, including "new architectures" for chip design and new kinds of memory chips. He cited several types of memory, including "MRAM," "ReRAM," (resistive RAM), "PCRAM," (phase-change RAM), and "FeRAM." The industry would also have to explore analog chip designs, chips that manipulate data as continuous, real-valued signals, rather than discrete units, and new kinds of materials beyond silicon.
While AMAT shares may have exceeded the company's return to growth from a "semi" cycle recession, it's clear that Dickerson & Co. are locked-on to the dominant trends of what I call the Technology Super Cycle.
And with a stock market set to make more new highs in 2020, AMAT will be one to definitely buy on the dips.
Yet another product of the retail apocalypse, Children’s Place, has had a very disappointing year for investors, with its share price falling over 32% so far in 2019. This dying retailer saw massive profit declines bringing it close to loses for Q1 and Q2. Its topline is also declining as demand for this children’s apparel fades. Analysts have been dropping their expectations for PLCE for some time, and this stock is now sitting at a Zacks Rank #5 (Strong Sell).
The company has closed over 200 stores since 2013, with 42 store closures in 2018 and another 45 closure expected by the end of this year. The company is en route to close about 1/3 of its stores in less than 10 years. Management will not give up despite the obvious systemic issues in its business model.
Children’s Place just acquired children’s brand Gymboree for $76 million (this acquisition also included Crazy 8 brand) after the company filed for its second bankruptcy in less than two years. Gymboree was forced to close down ¾ fourths of its stores following its January bankruptcy as the brand goes seemingly obsolete. Children’s Place is attempting to revitalize the company through rebranding, which I expect will take a substantial amount of capital and may not be successful.
The acquisition brought on an extensive amount of debt to the firm’s balance sheet bringing its total debt-to-capital up to 72%. This is a concerning level for me to see, especially when the firm is experiencing a declining top and bottom-line. If consumer discretionary spending dries up, this combined company will find itself in bankruptcy court pretty quickly.
Children’s Place is hoping to rejuvenate Gymboree with its 200 remaining stores and the relaunch of Gymboree.com in 2020. This whole venture is a massive risk, and I personally don’t see it working out.
Take Away
Children’s Place appears to have systemic issues that this new acquisition of an obsolete brand will not improve. I think that the purchase of Gymboree will mark the beginning of the end for this enterprise. PLCE is a falling knife, and I would stay away from these shares.
Additional content:
3 Stocks to Consider as Home Builder Confidence Hits 20-Year High
Home builder confidence in the newly built, single-family home market jumped 5 points in December to 76. This was the highest reading since June 1999, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
A strong domestic economy and a housing shortage helped drive the confidence to the highest level in two decades. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes and low mortgage rates,” NAHB Chairman Greg Ugalde said in a statement.
Let’s take a look at a few stocks that can potentially capitalize on the favorable conditions…
D.R. Hortonis the one of the largest homebuilders in the United States, with operations in 90 markets and 29 states. In the company’s recently reported fiscal 2019, 68% of its home sales were in the sub-$300,000 price point. First time homebuyers accounted for over 50% of sales.
The homebuilder has seen its shares climb around 55% in 2019, outperforming its broader industry’s 41% run. D.R. Horton trades at around 10.9X its forward earnings, which is just below the industry average of 11.8X forward earnings. In addition, the company has steadily raised its dividend over the past five years and it currently yields 1.28%.
Our consensus estimates for Q1 call for a top-line gain of 7.7% to $3.77 billion and a bottom-line hike of over 21% to $0.92 per share. D.R. Horton’s earnings estimates have been revised higher recently, helping earn DHI stock a Zacks Rank #2 (Buy).
M/I Homesshares have nearly doubled in 2019 to dwarf the S&P 500’s 26% run. MHO is coming off a third quarter where sales increased 15% and earnings rose 30%. M/I Homes sold a record 1,721 homes during the third quarter, which was a 32% improvement from the year ago quarter.
Our Q4 Zacks consensus estimate anticipates earnings to grow over 40% to $1.85 per share and for revenue to jump 14% to $824 million. MHO stock trades at around 8.3X forward earnings, which puts it at a discounted level compared to the industry average of 11.8X. The stock’s discounted forward multiple could provide a solid entry point for investors looking to ride the momentum of a homebuilder that has skyrocketed this year.
Meritage Homesis another homebuilder that has benefited from the favorable macroeconomic conditions. MTH shares have soared over 70% YTD and is coming off a third quarter that saw home closing revenue climb 7% and diluted earnings rally 35%. Total orders rose 24% in the third quarter as well.
Meritage Homes has also tried to focus on the shortage of entry-level homes in the housing market as its average sales price dropped 4%. The company also delivered 54% order growth in the entry-level market with the company’s LiVE.NOW. Homes.
While our estimates forecast moderate gains in the fourth quarter, our Q1 estimates tell a different story. Q1 estimates call for sales to rise 13.5% to $792.6 million and for earnings to soar over 67% to $1.09 per share. Looking even further down the line, our fiscal 2020 estimates predict total sales to reach $3.85 billion for a 9% bump and for earnings to climb over 20% to $5.68 per share. MTH sports a Zacks Rank #1 (Strong Buy) and is a good stock to consider for investors looking to cash in on the growth in entry level homes.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Applied Materials, Children's Place, D.R. Horton, M/I Homes and Meritage Homes highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – December 19, 2019 – Zacks Equity Research Shares of Applied Materials (AMAT - Free Report) as the Bull of the Day, Children’s Place (PLCE - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on D.R. Horton (DHI - Free Report) , M/I Homes (MHO - Free Report) and Meritage Homes (MTH - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Applied Materials, the giant semiconductor equipment maker, has seen its shares make an amazing recovery in 2019 -- even before the industry sales and profits confirmed their cycle lows.
To illustrate this, consider that in the middle of 2018, the EPS consensus for AMAT's next fiscal year (starting in Nov 2018) was $4.50. Then in the second half of 2018, estimates plunged on trade war worries and concerns that ole' bogey man, the semiconductor cycle, had just peaked.
Applied Materials, maker of wafer fabrication equipment (WFE) that helps chip companies make their wares, completed their FY19 (ended October) with full year EPS of just $3.04. But long before then, AMAT shares surged nearly 60% from the low $30s to mid $50s.
2019 was certainly a confusing time to be a chip investor. And it didn't necessarily get easier to understand when AMAT reported their Q419 on November 14 and shares jumped to fresh all-time highs above $60 as the company revealed a healthy upside boost to 2020 earnings guidance.
My colleague Ben Rains wrote about the results last month...
Applied Materials is a semiconductor equipment firm that has been on a tear in 2019 despite the fact that its sales and earnings fell for four straight periods. The company with a $55 billion market cap is a leader in “materials engineering solutions” that are used to make “virtually every new chip and advanced display in the world.”
The Santa Clara, California-headquartered firm is, of course, not alone in the notoriously cyclical semiconductor and chip industry. Big-names also posted four straight periods of declining revenues. But this is not totally unusual for chip firms, especially when they come up against hard-to-compare periods of outsized success.
Luckily, Applied Materials and others impressed Wall Street with their guidance. And the reason is relatively simple: every tech company relies on semiconductors and they will remain essential backbones of the technological revolution for years to come.
AMAT’s first quarter fiscal 2020 guidance came in well above Wall Street estimates, as signs of a recovery in demand continue. “Applied Materials’ fourth quarter results reflect a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company,” Applied Materials CEO Gary Dickerson said in prepared remarks.
“The semiconductor industry is increasingly adopting a new playbook for improving chip performance, power, area and cost, and we are investing in unique solutions to enable our customers’ success in the AI-Big Data era.”
(end of excerpt from Ben's November article)
From Cycle Peaks Come Cycle Troughs
After the company presentation and reinvigorated outlook, Wall Street analysts lifted AMAT EPS consensus 14% for FY20 (started in Nov) from $3.30 to $3.77, representing 24% growth.
On the topline, revenues are expected to recover 14% to $16.65 billion (the FY18 peak was $17.25B). And so it looks like the dreaded "semi cycle" was short and sweet -- if you held on to your stocks during the December 2018 rout.
And CEO Gary Dickerson knows why. In fact, he's known for years. Here's what Lizzy Gurdus wrote for CNBC in September 2017 after an interview with “Mad Money” host Jim Cramer...
Dickerson said that waiting for operating system upgrades and new mobile phone iterations may define the tech cycles of today, but the main focus will soon turn to the race for competitive AI.
“In the future, you’ve got transportation, health care, entertainment. All of these will change in amazing ways and create trillions of dollars of economic value. So you also have this war for AI architecture leadership that probably will be the biggest battle of our lifetime,” the CEO said.
Dickerson knows that big-data and AI progress will keep driving demand for more-advanced semiconductor capabilities and configurations, thus fueling a Renaissance of hardware development and investment.
Exponential AI is Exhausting Capacity
Prodigious technology analyst and writer Tiernan Ray (formerly of Barron's) covered for ZDNet.com a recent Silicon Valley conference of semiconductor executives discussing what to do about "the explosion in demand for deep learning forms of A.I. that is pushing at the limits of today’s chips."
Applied Materials, the dominant maker of tools to fabricate transistors, sponsored a full day of keynotes and panel sessions on Tuesday, called the "A.I. Design Forum," in conjunction with one of the chip industry's big annual trade shows, Semicon West.
After talking about the dramatic slowdown in Moore's Law to sub 5% performance improvement, Ray wrote "Dickerson went on to claim that A.I. workloads in data centers worldwide could come to represent as much as 80% of all compute cycles and 10% of global electricity use in the next decade or so."
This paragraph from Ray's article struck me as especially interesting because it describes Dickerson's challenging role in having to figure out what equipment a Micron will need for the next generations of memory chips...
That means the industry needs to seek many routes to solutions, said Dickerson, including "new architectures" for chip design and new kinds of memory chips. He cited several types of memory, including "MRAM," "ReRAM," (resistive RAM), "PCRAM," (phase-change RAM), and "FeRAM." The industry would also have to explore analog chip designs, chips that manipulate data as continuous, real-valued signals, rather than discrete units, and new kinds of materials beyond silicon.
While AMAT shares may have exceeded the company's return to growth from a "semi" cycle recession, it's clear that Dickerson & Co. are locked-on to the dominant trends of what I call the Technology Super Cycle.
And with a stock market set to make more new highs in 2020, AMAT will be one to definitely buy on the dips.
Bear of the Day:
Yet another product of the retail apocalypse, Children’s Place, has had a very disappointing year for investors, with its share price falling over 32% so far in 2019. This dying retailer saw massive profit declines bringing it close to loses for Q1 and Q2. Its topline is also declining as demand for this children’s apparel fades. Analysts have been dropping their expectations for PLCE for some time, and this stock is now sitting at a Zacks Rank #5 (Strong Sell).
The company has closed over 200 stores since 2013, with 42 store closures in 2018 and another 45 closure expected by the end of this year. The company is en route to close about 1/3 of its stores in less than 10 years. Management will not give up despite the obvious systemic issues in its business model.
Children’s Place just acquired children’s brand Gymboree for $76 million (this acquisition also included Crazy 8 brand) after the company filed for its second bankruptcy in less than two years. Gymboree was forced to close down ¾ fourths of its stores following its January bankruptcy as the brand goes seemingly obsolete. Children’s Place is attempting to revitalize the company through rebranding, which I expect will take a substantial amount of capital and may not be successful.
The acquisition brought on an extensive amount of debt to the firm’s balance sheet bringing its total debt-to-capital up to 72%. This is a concerning level for me to see, especially when the firm is experiencing a declining top and bottom-line. If consumer discretionary spending dries up, this combined company will find itself in bankruptcy court pretty quickly.
Children’s Place is hoping to rejuvenate Gymboree with its 200 remaining stores and the relaunch of Gymboree.com in 2020. This whole venture is a massive risk, and I personally don’t see it working out.
Take Away
Children’s Place appears to have systemic issues that this new acquisition of an obsolete brand will not improve. I think that the purchase of Gymboree will mark the beginning of the end for this enterprise. PLCE is a falling knife, and I would stay away from these shares.
Additional content:
3 Stocks to Consider as Home Builder Confidence Hits 20-Year High
Home builder confidence in the newly built, single-family home market jumped 5 points in December to 76. This was the highest reading since June 1999, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
A strong domestic economy and a housing shortage helped drive the confidence to the highest level in two decades. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes and low mortgage rates,” NAHB Chairman Greg Ugalde said in a statement.
Let’s take a look at a few stocks that can potentially capitalize on the favorable conditions…
D.R. Hortonis the one of the largest homebuilders in the United States, with operations in 90 markets and 29 states. In the company’s recently reported fiscal 2019, 68% of its home sales were in the sub-$300,000 price point. First time homebuyers accounted for over 50% of sales.
The homebuilder has seen its shares climb around 55% in 2019, outperforming its broader industry’s 41% run. D.R. Horton trades at around 10.9X its forward earnings, which is just below the industry average of 11.8X forward earnings. In addition, the company has steadily raised its dividend over the past five years and it currently yields 1.28%.
Our consensus estimates for Q1 call for a top-line gain of 7.7% to $3.77 billion and a bottom-line hike of over 21% to $0.92 per share. D.R. Horton’s earnings estimates have been revised higher recently, helping earn DHI stock a Zacks Rank #2 (Buy).
M/I Homesshares have nearly doubled in 2019 to dwarf the S&P 500’s 26% run. MHO is coming off a third quarter where sales increased 15% and earnings rose 30%. M/I Homes sold a record 1,721 homes during the third quarter, which was a 32% improvement from the year ago quarter.
Our Q4 Zacks consensus estimate anticipates earnings to grow over 40% to $1.85 per share and for revenue to jump 14% to $824 million. MHO stock trades at around 8.3X forward earnings, which puts it at a discounted level compared to the industry average of 11.8X. The stock’s discounted forward multiple could provide a solid entry point for investors looking to ride the momentum of a homebuilder that has skyrocketed this year.
Meritage Homesis another homebuilder that has benefited from the favorable macroeconomic conditions. MTH shares have soared over 70% YTD and is coming off a third quarter that saw home closing revenue climb 7% and diluted earnings rally 35%. Total orders rose 24% in the third quarter as well.
Meritage Homes has also tried to focus on the shortage of entry-level homes in the housing market as its average sales price dropped 4%. The company also delivered 54% order growth in the entry-level market with the company’s LiVE.NOW. Homes.
While our estimates forecast moderate gains in the fourth quarter, our Q1 estimates tell a different story. Q1 estimates call for sales to rise 13.5% to $792.6 million and for earnings to soar over 67% to $1.09 per share. Looking even further down the line, our fiscal 2020 estimates predict total sales to reach $3.85 billion for a 9% bump and for earnings to climb over 20% to $5.68 per share. MTH sports a Zacks Rank #1 (Strong Buy) and is a good stock to consider for investors looking to cash in on the growth in entry level homes.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.