Applied Materials Inc. (NASDAQ: AMAT) is on deck for earnings this afternoon right after the market closes. The chip equipment giant, and relatively new solar player, is the king of its sector to most traders and investors and will potentially have an impact on all the chip equipment stocks in the sector. Estimates from Thomson Reuters are $0.03 EPS and $1.32 billion in revenues for its October quarter, which is also its year-end with estimates of -$0.14 EPS and $4.80 billion in revenues.
Applied Materials does represent about 13.55% of the Semiconductor HOLDRs (NYSE: SMH) ETF, but only represents about 5% of the Ultra Semiconductor ProShares (NYSE: USD) ETF. We will be looking to its fiscal-2010 comments more than this last quarter.
While many analysts expect a recovery for 2010, with Thomson Reuters estimates at $0.38 EPS and $6.20 billion in revenues (higher than just a week ago), there is the notion of what to say about valuation and its stock performance. With a loss for 2009 and with a P/E ratio of over 30 for next year, the bulls have to bet that the semiconductor companies are going to hike orders well above what the official expectations reflect even after considering the recently raised estimates.
Applied Materials was at $12.40 just on the close Friday, and shares are at $13.17. This new increase represents gains of over 50% from March 9 and 15% just since June 30. What is important here is the stock chart. Shares did not get back down to the 200-day moving average two weeks ago ($11.66 now) and the current 50-day moving average ($13.02) was pierced this week. $13.75 has acted as strong resistance in September and October.
Analysts are mixed and it appears that a consensus price target is over $15.00. Options have been a bit active today ahead of earnings and it appears as though options traders are not really bracing for a move of more than $0.40 in either direction.
What is interesting is that the earnings reaction from Applied Materials is not likely to run back upstream to the end-users and makers of chip and semiconductors. We have already seen their earnings and more importantly their guidance, and in theory they can all hold off on cap-ex spending even if a recovery comes on stronger than what has been seen and compared to what is expected. At the same time, cap-ex and equipment purchasing has greatly lagged the overall chip and tech recovery and Applied’s comments may potentially be key for evaluating semiconductor companies on their expense plans farther out into 2010.
Lastly, we will be paying close attention to what the company says regarding its solar operations for 2010. The entire sector is under pressure as margins are contracting and orders are getting harder to come by or are getting pushed out. Solar can be and is a great help to the energy problems that America and all countries face, but in many aspects these solar stocks may represent nothing more than a call option on much higher oil prices. Stay tuned.
JON C. OGG
NOVEMBER 11, 2009
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