UBS: Time to Buy Applied Materials, Apple Could Drive Near-Term Upside

Expressing increased confidence in an EPS upside for Applied Materials, Inc. AMAT, UBS’ Stephen Chin mentioned that OLED equipment sales, foundry capex, higher opex leverage and high exposure to China’s semis capex could drive P/E multiple expansion for the stock

The analyst upgraded the rating on Applied Materials from Neutral to Buy, while raising the price target from $21 to $27.

OLED Upside

Chin expressed optimism regarding the company’s display division, mentioning that “one of the iPhone models could use OLED as early as 2H17 before likely wider adoption in 2018.”

In fact, the analyst expects Applied Material to be able to take one-third share of any new tools for the OLED ramp at Apple Inc. AAPL.

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“We estimate that Apple may initially need to purchases about 50k spm of gen-6 OLED capacity to support one iPhone model using 5.5 inch OLED for a 2H17 refresh,” Chin stated.

The FY17 EPS estimate for the Display business has been significantly raised, given that Applied Materials is now expected to have a 20 percent share of the $8 billion market, with new products and higher layer count.

Foundry Capex & China Semis

With expectations of Foundry capex rising 1 percent in 2016 and 10 percent in 2017, Chin pointed out that Applied Materials “historically has high market share at foundry customers.”

“We are also more comfortable that Applied's new semicap products in ALD, E-Beam and Etch could help drive services sales upside closer to the industry average,” the analyst stated.

The EPS estimates for FY16 and FY17 have been raised from $1.35 to $1.37 and from $1.50 to $1.87.