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Applied Materials (AMAT) Up 3.9% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Applied Materials (AMAT - Free Report) . Shares have added about 3.9% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Applied Materials due for a pullback? 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.

Applied Materials Q2 Earnings & Sales Miss Estimates

Applied Materials Inc. reported fiscal second-quarter 2020 non-GAAP earnings of 89 cents per share, which missed the Zacks Consensus Estimate by 2 cents. Moreover, the figure declined 9.2% sequentially but increased 27% year over year.

Net sales of $3.96 billion missed the Zacks Consensus Estimate by 5.69%. However, the figure improved 11.9% from the year-ago period.

The company witnessed solid momentum in key geographies, namely Korea, Taiwan and China.

Though the company saw weaker-than-expected demand due to the coronavirus outbreak, it said that the demand for equipment and services still remained strong.

Let’s delve deeper into the numbers.

Segments in Detail

The Semiconductor Systems Group generated $2.6 billion sales in the reported quarter (contributing 65% to its net sales), reflecting an increase of 17.5% year over year.

Applied Global Services reported sales of $997 million (26% of net sales), which increased 3.5% from the prior-year quarter.

Sales from the Display and Adjacent Markets came in at $332 million (9% of net sales), up 4.9% from the year-ago level.

Revenues by Geography

United States, Europe, Japan, Korea, Taiwan, Southeast Asia and China generated sales of $331 million, $181 million, $467 million, $753 million, $1.03 billion, $58 million and $1.14 billion, contributing 8%, 5%, 12%, 19%, 26%, 1% and 29% to net sales, respectively.

On a year-over-year basis, we note that sales in all the countries declined except Korea, Taiwan and China, which witnessed growth of 70.7%, 36.5% and 14.6%, respectively.

Operating Results

Non-GAAP gross margin was 44.6%, expanding 110 basis points (bps) from the year-ago quarter.

Operating expenses were $817 million, 8.4% higher than the year-ago quarter. As a percentage of sales, research, development and engineering, and marketing and selling expenses decreased, while general and administrative costs increased.

Non-GAAP operating margin of 24.7% in the reported quarter expanded 230 bps from the prior-year period.

Balance Sheet & Cash Flow

At the end of the fiscal second quarter, cash and cash equivalent balance was $5.7 billion compared with $3.42 billion at the end of fiscal first quarter.

Inventories were $3.73 billion versus $3.47 billion in the prior quarter. Accounts receivables decreased to $2.63 billion from $2.68 billion in the fiscal first quarter.

The company returned $199 million and $193 million through stock repurchases and cash dividends, respectively.

Notably, Applied Materials generated cash flow of $635 million, down from $987 million in the fiscal first quarter.

Guidance

The company did not provide any guidance for the June quarter due to manufacturing and supply-chain disruptions from COVID-19 crisis.

Bottom Line

Management believes that demand for foundry logic is expected to remain strong in the near term, thanks to rising need for specialty nodes in automotive, power, 5G rollout, IoT, communications and image sensor markets.

Also, ongoing inventory correction in DRAM is a tailwind for the near term. The company expects more clients to upgrade their equipment ahead of the 5G rollout in key markets, which will help it expand top-line growth.

However, the company expects weakness in specialty markets due to retraction in the automotive and industrial sectors.

Nevertheless, the company remains confident about its relentless focus on research and development activities to develop new products.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -5.38% due to these changes.

VGM Scores

At this time, Applied Materials has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

Applied Materials has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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