4 Reasons Credit Suisse Remains Positive On Applied Materials

Shares of Applied Materials, Inc. AMAT have climbed 12 percent after the company reported better-than-expected results and outlook.

Positives Abound

Credit Suisse analyst Farhan Ahmad, who has an Outperform rating on the stock, has outlined four reasons why he is positive on the company.

• 1. "In Near term, 10nm Foundry ramp and ongoing 3D NAND investments reduce risk to WFE in C2H16. Semicaps should be easier to own relative to semis given above seasonal expectations for C2H16 Semis."
• 2. "China investments could become even more meaningful in 2017 as Chinese memory companies start to spend."
• 3. "HDD to SSD transition could drive multiyear investment cycle for NAND."
• 4. "Valuations are attractive. AMAT is trading at 12x of our CY16 EPS versus last 5-year average (excluding period of TEL merger) of 13.5x."

Looking Forward

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 (CS/Street at $2.61 billion/$2.51 billion), driven by highest ever orders in NAND.

Related Link: Applied Materials Just Got Its Mojo Back

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 midpoint of revenue/EPS guidance of $2.84 billion/$0.48 was well above Credit Suisse at $2.52 billion/$0.36 and street at $2.53 billion/$0.37.

"We expect C2H16 Rev/EPS to remain flattish from C2Q, given our view of flattish H/H Rev growth in SSG and Company's positive commentary on Display," Ahmad highlighted.

The analyst raised his 2016 revenue/EPS view to $10.7 billion/$1.67 from $10.1 billion/$1.46, and 2017 revenue/EPS estimate to $10.8 billion/$1.77 from $10.7 billion/$1.72.

Ahmad also increased target price to $25 from $23, saying buybacks and cost cuts are driving $0.15 of EPS growth this year.

Further, the analyst expects up to additional $4 billion in shareholder returns, while share gains in OLED could result in display revenue growing more than 10 percent CAGR over the next three years.

"We see potential for $2 earnings power by 2018 which could support $30 stock price by end of next year," Ahmad added.