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Applied Materials Just Got Its Mojo Back

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Applied Materials Just Got Its Mojo Back
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Stephen Chin of UBS maintains his Buy rating on Applied Materials, Inc. (NASDAQ: AMAT) as better-than-expected quarterly results and guidance gives the analyst "confidence the stock still has multiple ways to work."

For the second quarter, the company reported adjusted EPS of $0.34 on revenue of $2.45 billion, topping the Street's view of $0.34 on revenue of $2.43 billion. Orders for the second quarter rose 37 percent to $3.45 billion.

Related Link: 10 Highlights From Applied Materials Conference Call

"[W]e believe the stock has at least 5 ways to work including 1) higher OLED equipment sales as Apple and others use OLED screens on smartphones or other devices 2) higher exposure to foundry customers who lead capex next year 3) market share gains in Services after several successful new product launches 4) additional opex cuts following the failed merger with Tokyo Electron, 5) possible sales upside to new indigenous China customers such as XMC," Chin wrote in a note.

Applied Materials expects an adjusted EPS of $0.46–$0.50 for the third quarter and net sales to rise 14–18 percent from the second quarter. The Street expects EPS of $0.37 and revenue of $2.53 billion.

Good News For The Whole Sector

The strong results of Applied Materials, which makes equipment to make semiconductor processors, is a positive read-thru for the entire semiconductor industry as the company's results is seen as a yardstick to gauge the health of the sector.

"We were most impressed with Applied's execution in winning a big OLED equipment order (we believe Samsung) as Display orders were $700 million (up from typical average of $150 million/qtr). Applied guided strong 2H16 display orders which suggest this was not the peak," Chin highlighted.

Further, the analyst sees an "even higher peak Display order" with equipment for OLED TVs. Chin expects Applied has an additional $0.50 in EPS upside in FY18 if a new OLED TV cycle starts.

Related Link: Cramer Says Applied Materials' Call Was One Of The "Most Bullish" Events In Years

Chin has raised his FY16, FY17 and FY18 EPS estimates to $1.55, $1.90 and $2.10 from $1.37, $1.85 and $2.05, respectively.

The analyst is also "impressed" with solid execution in China, where total orders were 26 percent of its total and at an all-time high at $900 million.

"We believe most was for semicap and split evenly across SMIC, Intel China, UMC China and Samsung China. We believe a higher China order peak is possible if indigenous customers such as XMC move forward and actually spend $24 billion in capex over the next few years," Chin elaborated.

The analyst estimate Applied Material's EPS upside from XMC could be $0.33/year that was not part of his model.

Chin also raised his price target on the stock to $28.50 from $26, while shares surged more than 12 percent to $22.40 Friday afternoon.

Latest Ratings for AMAT

DateFirmActionFromTo
Oct 2016Goldman SachsMaintainsBuy
Aug 2016UBSMaintainsBuy
Aug 2016CitigroupMaintainsBuy

View More Analyst Ratings for AMAT
View the Latest Analyst Ratings

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