Applied Materials Upgraded At Susquehanna After 25% Correction

In a report issued Friday, Susquehanna analysts Mehdi Hosseini, David Ryzhik and Bill Grinstead boosted the rating on shares of Applied Materials, Inc. AMAT from Negative to Neutral, while raising their price target from $15.00 to $18.00. The upgrade responds to the stock’s 25 percent year-to-date correction.

Despite lukewarm sales growth, the analysts expect the upcoming resizing to “help with operating leverage - and thus help with double-digit earnings growth next two years.” Consequently, they model fiscal 2015 earnings of $1.20 per share, fiscal 2016 earnings of $1.24 per share, and fiscal 2017 earnings of $1.50 per share.

The Initiatives

Applied Materials will host its annual Analyst Day on Monday, basically kicking off SEMICON West 2015. Susquehanna expects the company to share its resizing plans, aimed at better managing the margin profile now that the TE Connectivity Ltd TEL seems no longer viable.

The aforementioned resizing will come accompanied by:

1) Amplified efforts to gain market share

2) A “more muted WFE spending trend over the next several years (though we do expect AMAT to maintain the tradition of talking up longer term prospects of WFE hitting $38B),” the experts explain.

All in all, they believe there is limited downside risk to the stock, since:

1) The stock already fell about 25 percent since the beginning of the year

2) Investors no longer believe in exaggerated earning prospects

3) Management is switching from an offensive strategy to a defensive one by resizing the company.